Yesterday, Johnson and Johnson announced that they intend to acquire Actelion, the Swiss Biotech company for 280 USD per share.
The stock price jumped to around 272 CHF/USD right after the announcement indicating a relatively high probability of closing. J&J has enough money on their bank account and according to the press, most Actelion shareholders should be happy.
Closing date is targeted as June 30th. So if everything goes according to plan, this would mean ~2,9% yield for 5 months which is not bad but not that great either (as there are always risks) , so why bother ?
However there is an interesting specialty in this case which I didn’t see when I first looked into it. The official announcement contained this potential “golden nugget”:
Uniper /E.On Spin-off
In David Einhorn’s latest letter to investors he mentions the following:
We purchased E.ON (Germany: EOAN) in the fourth quarter of 2015. When EOAN spun out Uniper (Germany: UN01) in September, we kept the UN01 shares we received at €10.02 in thetransaction and sold the balance of our EOAN stake at a modest loss to redeploy that capital into additional UN01 shares. We believe the market does not appreciate the earnings stability o fUN01’s power generation and natural gas logistics assets. Further, the incoming management team is incentivized and has committed to cost-cutting, which will create a powerful cash flow profile. We own the company at 6x our 2017 earnings estimate.
So looking back this was a smart move. Although Uniper’s stock price came back a little bit, Einhorn is still up like 35% and has done clearly better than holding on E.On:
´So far, my blog has been 99,9% “Trump Free”. As a German, I haven’t really followed what Trump did and said over the last decades so I think I am not able to form a qualified opinion about him or what he will do as POTUS.
I think it is also waste time to watch TV shows where German politicians debate what Trump will do or not because most of them don’t have a lot of background knowledge either. As with stock analysis, I am a big fan of “Primary resources” and so I decided that I should at least read one book co-authored by “his Trumpness” himself. There are many Donald Trump books out there but the first one from 1987 is “the Art of the deal”. I thought that maybe the first one is also the most authentic one.
The book starts with the description of a typical week of Donald Trump in early 1987. Clearly this is meant as a name dropping exercise to impress the readers about the then not so famous Mr. Trump. Indeed the list is quite long and interesting.
Michael Lewis is clearly “THE” author for financial books at the moment. His books are usually great to read, very well researched and a few of them have already turned into movies like “The Big Short”.
“The Undoing Project” is the story of Amos Tversky and Daniel Kahneman, two Israeli professors who developed the so-called “Prospect Theory” which deals with the behavioural “biases” that the human mind shows when deciding under uncertainty. And for which Kahneman got the Nobel Prize in 2002 (Tversky unfortunately died some years before that).
Up until Prospect Theory, the human mind was assumed to be perfectly rational for most theories dealing with human behaviour and decision-making. As stock investors we all know that human behaviour in the stock market is anything but rational, however only following the groundbreaking work of those two guys, we now have a more structured way to understand how the mind really works.
The book covers the story of this “unlikely” pair of academics who started this revolution plus some side stories about people who were greatly influenced by them, for instance in Basketball and Medicine.
The book describes in very great detail how the relationship between Tversky and Kahneman developed, how it was interrupted by the different Israeli wars, how they moved from Israel to the US and how it ended. To be honest, I found this a little too much detail. It is an interesting story , no doubt, but I guess a few pages less would have made the book better.
Towards the end I really had to force myself to finish the book when Lewis describes in great detail how they tried more or less successfully to counter their critics. I think this was my first Michael Lewis book where I seriously thought about not finishing it.
All in all I would say it is an OK book for people who like those kind of biographic books, however for people interested in the theory and topic itself, Kahneman’s book “Thinking Fast and Slow” in my opinion is the much better choice.
The Company / Spin-off
Gocompare.com (GoCo) has been spun-off from parent Esure in the beginning of November, a week before the US elections and only a few days before Italgas SpA. As a “parting gift”, Esure took out a special dividend of about 75 mn GBP financed by some net cash and a 70 mn GBP loan before spinning the company off-
In my understanding, the major reason for the spin-off was that Esure, the listed UK online direct insurer was short in solvency capital and that this transaction improved the solvency substantially.
Every Esure investor got one GoCo share for an Esure share. Interestingly, Toscafund, the second largest shareholder only holds 14% in Goco compared to 16,7 for Esure, so they seem to have sold some shares.
John Hempton has a very interesting post on when to average down into a stock.
As a summary, one should not average down into a stock if
- a company has a lot of financial leverage
- a company has significant operating leverage
- the company is in danger of becoming obsolete
I think this is already a pretty good advice, as a counter example he gives Coca Cola where one can average down “without much risk”. As this is a very interesting topic, I wanted to contribute my 5 cents to this:
Behavioural biases at work
In my experience, averaging down is often motivated by a couple of behavioural biases.
The major bias which “helps” investors and especially professional ones to average down in the wrong cases is in my experience the “over confidence” bias.
Guy Spier discusses his failed Horsehead investment
Michael Mauboussin on active vs. passive
John Hempton on when to average down
The Fundoo Professor and Charlie Munger on the diffêrences between buying and holding a stock
Eddy Elfenbein had a tough 2016, but his 2017 buy list is still a must read
Some interesting thoughts on Amazon’s “Operating System”
Nice story on Oscar, the US Health Insurance start-up
In 2016, the blog portfolio gained +12,42% (including dividends, no taxes) against 4,55% for the Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%)).
Some other funds that I follow have performed as follows in 2016:
Partners Fund TGV: +15,95%
Squad European Convictions +18,51%
Ennismore European Smaller Cos -1,49% (in EUR)
Frankfurter Aktienfonds für Stiftungen +6,2%%
Evermore Global Value +21,5%
Greiff Special Situation +5,88%
Since inception (01.01.2011), this translates into +135,6% or +16,9% p.a. vs. 69,5% or 10,1% p.a. for the benchmark. Graphically this looks like this: