2021 End of Year Review

The holidays have passed in a blink of an eye and we are back online – starting the new year with a full 2021 SSI review. But before we dig into that, huge thanks to all subscribers for supporting our efforts, for sharing profitable investment opportunities, and for actively participating in discussions – without you, our work would not be as exciting as it is today. Thank you all!

Last year was exceptionally interesting for equity markets, filled with many unprecedented events that really lived up to the name of “the biggest casino in the world”. Great volatility always provides great trade opportunities, especially for event-driven investing, and at SSI we have managed to capture some of these quite well.

For SSI 2021 proved to be yet another monster year with 148 new investment ideas published and with the tracking portfolio up 50%+ for the second year in a row. We are really excited about what’s to come and ready to discover new and exciting investment opportunities.

Here are some quick stats for 2021:

  • Tracking portfolio +54% during 2021 and +550% since 2017. See full details here.
  • 148 investment ideas published on SSI – 56 main and 92 quick.

Below we share tracking portfolio performance breakdown and elaborate in more detail on the best and the worst investments as well as some common event-driven themes that seemed to have worked out quite well during 2021.

This chart illustrates a detailed breakdown of returns on individual SSI ideas that were active during 2021 and that were part of SSI tracking portfolio (i.e. quick ones are excluded). While a large part of these event-driven trades generated returns in the range of 10%-40%, keep in mind that the average holding period was just a few months or less, which translates into impressive IRRs. That’s the nature of special situation investing.

Note: the indicated returns are for the calendar year 2021 and not total returns for each case.

 

BEST PERFORMERS OF 2021

  • Meten EdtechX Education Group (METX) – warrant arbitrage +240% in a month
    This was one of those situations which seemed too good to be true. METX was a failed post-merger SPAC that temporarily reduced the exercise price of its warrants from $11.50 to $1.40 as the company was desperately short on cash. Warrants were trading at $0.29, while the stock price at $2.26 suggested a multi-bagger arbitrage opportunity on the warrant price. Incentives behind the offer seemed reasonable as METX was low on liquidity after 95% of shareholders redeemed their shares. The spread most likely existed due to limited coverage among retail investors/media and rather unattractive background of the company. The warrant exchange proceeded smoothly and this turned out to be one of the most lucrative SSI cases. The return on hedged trade after borrow costs ended up at +175% – calendar year 2021 return was larger at +240% due to warrant price decline in Dec’20.
  • AMC Entertainment (AMC) – options trade +100% in two weeks
    2021 was probably the year of short gamma squeezes and there were a number of ways to profit from these – selling volatility being one of them. During the short squeeze and increased volatility, AMC option premiums reached stratospheric levels for near-term expirations. Two-week way out-of-the-money calls with an exercise price of $145 were at $16 premiums. At the time AMC shares were trading around $60/share, already 5x above the pre-squeeze price. Multiple arguments suggested that even with further market irrationality AMC shares are unlikely to reach $145 levels. This proved to be correct and the $60-$70/share price was the top for AMC. Calls expired worthless and OTM call sellers pocketed the whole juicy premium. There were a number of similar option trades on the other squeezed names as well – just recently, we’ve closed a somewhat similar trade – East Stone Acquisition (ESSC) +80% in 3 weeks.
  • Think Childcare (TNK.AX) – bidding war +93% in 4 months
    Over the last year, Australian market has provided a number of attractive special situation opportunities, mergers with unexplained large spreads, and several bidding wars. TNK was a prime example of a merger arbitrage/bidding war investment case that played out perfectly. Australian childcare services provider Think Childcare was being targeted by two bidders – financial (Alceon) and strategic (Busy Bees). Initially, Alceon’s A$1.35/share offer got outbid by Busy Bees A$1.75/share proposal. Multiple aspects including strong strategic rationale and opportunistic timing indicated that Busy Bees is unlikely to walk away. Moreover, comparison with peer valuations and rebound in TNK’s financial performance strongly suggested that the buyers are likely to continue bidding up the price. Eventually, Alceon upped the offer to A$1.75, while Busy Bees countered with A$2.10/share. Shortly after, TNK released very positive annual results and Busy Bees increased the offer one more time to $3.10/share. The idea generated 113% in 4 months (2021 return slightly lower at 93%).
  • Belpointe REIT (BELP) – premium to NAV elimination +20% in 1.5 months
    Not in the top part of the chart, but probably a personal favorite arbitrage this year. The case was so straightforward and simple that I could hardly believe the spread existed at all, and here we had a staggering 30% spread almost right to the last day of delisting. I was constantly thinking that I might be missing something as there seemed to be no explanation why the situation still exists. This was quite an unusual case. Externally managed opportunity zone fund Belpointe REIT, with portfolio mostly in cash, was undergoing a structural reorganization and was trading significantly above NAV. The most interesting part is that after the reorganization the company planned continuous issuance of $750m (vs $114m NAV) units at NAV or $105/unit, whereas BELP was trading in $130-$160/share range. It was obvious that such premium to NAV cannot persist and once the share issuance program gets announced, BELP shares would return to the intrinsic value. Everything played out exactly as planned. This was definitely one of those investments you wish you had sized higher.

 

WORST PERFORMERS OF 2021

  • Sequential Brands (SQBG) – expected company sale -68% in 2.5 months
    SQBG was a highly leveraged equity stub with a portfolio of mostly apparel brands (Jessica Simpson, Gaiam, Joe’s Jeans, etc.). Some aspects suggested that the company is going to be sold. However, the company was packing an extreme amount of debt, had already tripped its debt covenant and was living on waivers from KKR. There was a real risk of bankruptcy. However, KKR’s behavior (multiple waivers, no board appointments, etc), the announced strategic alternatives review, resignations of CEO and CFO strongly suggested that SQBG is moving towards a business sale. Comparison with peers indicated potential multi-bagger upside if all went right. The company managed to sell one of the brands, however, unfortunately, no further sales materialized. Delayed financial reports, the resignation of the Chairman and share sales by major holder suggested that the thesis is going in the wrong direction. Eventually, we closed the idea with a large 68% loss in 2.5 months. Two months later SQBG filed for bankruptcy. Looking retrospectively, it was a very speculative bet on a hyped-up stock. Near bankruptcy equity stubs are always risky, however, when the leverage of such magnitude is involved and the whole outcome depends on one debtor’s waivers, maximum pre-caution is required.
  • Alpha Pro Tech (APT) -30% in 2.5 months
    This was another highly risky and speculative bet, not an investment and not one of the usual SSI ideas. It seemed, that after the first wave of short squeezes (GME, AMC, BB, etc.) subsided, Reddit/WSB crowd will start looking for the next names with high short interest to squeeze. Alpha Pro Tech seemed like a decent candidate due to its limited float (35% on a $200m market cap), 25% short interest rate, recently increased trading volume as well as the impression of being cheap due to a couple of quarters of COVID driven growth. And while we guessed the target correctly and there was 36% initial spike in the share price, APT did not manage to get enough attention from Redditors/WSB and the share price retreated back down. Q4 results also didn’t live up to the expectations, pressing the stock further. The idea was closed with a 30% loss in 1.5 months.
  • Renren (RENN) – litigation settlement -42% in 2.5 months
    A litigation settlement case that seemed to be clear cut with shareholders waiting for the payout. The main uncertainties seemed to be only the size of lawyer fees as well as the valuation of the stub post-settlement payout. However, the case was unexpectedly twisted by a previous shareholder who filed an objection claiming that the settlement funds should be paid out to historical shareholders and not the current ones. Shares hardly budged on this announcement as the market expected the objection to be dismissed outright by the court. After the judge appeared to support this objection, RENN’s share price was cut in half. Insights from our members suggest that due to the nature of the suit, current shareholders are still going to win it, but the timeline could extend to 12-18 months. We are still keeping this idea open.

 

WHAT WORKED: ASSET SALE AND CAPITAL RETURN TO SHAREHOLDERS

Last year we have posted a number of situations where the company was due to sell (or has already sold) a substantial part of the business and was expected to return capital to shareholders in one way or another. It seems that the market always underestimated either the amount of capital that will be returned to shareholders or the valuation of the remaining business.

  • Laureate Education (LAUR)
    Private education company Laureate Education had recently sold a substantial part of its business and was continuing the liquidation process with a pending Walden University sale (50% of the remaining business). Walden sale seemed likely to be completed successfully and was due to be followed by substantial distribution to shareholders. The remaining assets were also expected to be sold after the normalization of earnings post-covid. LAUR seemed dirt cheap trading at 3.6x TTM EBITDA while applying conservative enough multiples for remaining operations suggested 50% upside. Control by a consortium of credible PE firms including KKR provided confidence in the liquidation process. As expected, Walden’s sale was completed and the company announced a large $7.01/share special dividend (half of the market cap at the time of the write-up). Idea was closed with 32% return in 4 months.
  • Box (BOX)
    Cloud content management services provider Box announced a $500m investment from KKR with intentions to use the proceeds to buyback shares through a tender offer. The planned tender offer was clearly aimed to please the current shareholder (in light of potential proxy fight by an activist) and management seemed highly incentivized to place the price range at a premium to prevailing share prices. As expected, the announced tender range was at a premium to market price and the case was closed with 20% return.
  • BrightSphere Investment Group (BSIG)
    BSIG was in the process of transferring from a multi-boutique asset manager to a single boutique-focused manager. 5 out of 7 affiliates had already been sold. The sale of the 6th was expected to close in Q3’21. After the sale, BSIG was expected to remain with more than half of the market cap in cash. Management made numerous comments that they would return a substantial portion of cash to shareholders. Besides that, pro-forma valuation of remaining business seemed way too low trading at 6x adj. EBITDA, substantially below where smaller affiliates were sold. As expected, after the sale of the 6th affiliate, BSIG announced a tender offer for 42% outstanding shares 20% above the write-up prices.
  • Dorel Industries (DII-B.TO)
    The company had recently announced unexpected sale of Sports division (a third of revenues and earnings) at more than 2x of the pre-announcement market cap has been a major gamechanger and has proven two things – that the market was significantly undervaluing Dorel and its subsidiaries and that management is still able to create significant value for all shareholders. The cash proceeds were expected to be used to reduce debt and to return capital to shareholders. The remaining businesses were trading at 3xEBITDA. Just 3 months later the company announced special dividend equivalent to 60% of the market cap and a further 10% stock buyback authorization.
  • Dundee Corporation (DC-A.TO)
    For this case the thesis has actually failed as there was no capital return, however, we still closed the idea profitably. Dundee had recently sold a major non-core asset at 1x BV, while the company was trading at a significant discount to BV. The updated Dundee’s investor presentation put much more emphasis on the material cash position and stressed stock undervaluation. Given the context of previous buybacks, management’s decision to become more vocal seemed to be a sign of another upcoming buyback or tender offer. However, nothing of sort was announced with the Q3 results – quite the opposite, management intended to focus on growing Dundee mining portfolio instead. As near term tender offer seemed to be off the table and there was no clear catalyst for Holdco discount to narrow, we decided to close the idea with a 13% gain in 2 weeks.

 

WHAT WORKED: LIQUIDATIONS

Although liquidations often take longer and do worse than initially expected, the liquidation cases posted on SSI during 2021 worked out pretty well albeit most of these were rather illiquid nanocaps.

  • Laureate Education (LAUR)
    Already highlighted above in the ‘expected tender offers’ section. We have closed the idea with a +32% gain in 4 months after the special dividend, however, the liquidation is still ongoing and we are keeping an eye on this one for more opportunities in the future.
  • KKV Secured Loan Fund C (KKVX.L)
    The idea was closed+58% in 2.5 months. Liquidation of a UK’s structured debt fund. New management had a splendid track record of such liquidations and a large portion of the debt portfolio was close to maturity. Management was able to organize significant asset disposals and returned capital even faster than we had expected initially.
  • Harvest Oil & Gas (HRST)
    HRST had already sold all of its operating/property assets and the remaining book value was/is comprised of cash and sellers note due in 2025/2027 but likely to be repaid much sooner. Due to the SEC changes to dark stocks we removed this idea from the active cases as HRST became untradeable. However, the liquidation is still ongoing and more than half of the investment value has already been returned through special dividends.
  • Africa Opportunity Fund (AOF.L)
    This was/is a portfolio of listed/unlisted equity stakes in sub-Saharan Africa in liquidation mode and a significant discount to NAV. The stock appreciated +25% since the write-up, this idea turned out to be unactionable for most due to extremely low trading volumes.

 

WHAT WORKED: MERGER ARBITRAGE IN CERTAIN INDUSTRIES

Community Banks. Probably the easiest merger arbitrages so far to bet on have been acquisitions of tiny/smallish community banks. There are always clear merger synergies and acquisitions seem to be done at reasonable multiples of BV. Downside to pre-announcement prices had always been quite limited. A relatively high number of cases have worked out well over the last year.

Precious Metal and Other Miners. Another industry where merger arbitrages have also almost always worked out is mining, especially for companies listed on Canadian stock exchanges. For these names, the spreads of 20%+ have been common, most probably due to lack of investor following and lower market caps (under $200m) rather than actual risks of the transaction falling apart.

Cannabis Companies. This was another industry where mergers with double-digit spreads tended to close successfully. Even after the exuberance in the cannabis space (with respect to elevated stock prices) somewhat faded, consolidation in the industry continued.

 

MOST VIEWED AND MOST DISCUSSED

5 most viewed posts during 2021

5 most discussed ideas during 2021:

Published on: January 5, 2022  •  Published by:
Category: Updates