There is, however, another breed of lesser discussed investor; the special situations investor. These investors look to profit, in the short term, from opportunities that present themselves. There are myriad opportunities but we will examine three common ones.
Merger Arbitrage
The acquisition of TAMIM holding Uniti Group Limited (UWL.ASX) was a text book merger arbitrage opportunity. A telecommunications and digital infrastructure entity holding infrastructure assets that have been in demand with several similar entities acquired in 2021.
The below chart shows the share price (SP) movement from $4.12, when UWL first mentioned discussions with parties in relation to a takeover, to $4.99 after a binding scheme implementation deed was signed, a 21% gain in just under three months.
Geopolitical Events
On 10 November 2021, the United States reported an unusual movement of Russian troops near the border of Ukraine. By 28 November, Ukraine had reported a build-up of 92,000 Russian troops.
On 7 December, US President Joe Biden warned President of Russia, Vladimir Putin of “strong economic and other measures” if Russia attacked Ukraine. This signalled the willingness of the United States to assist, potentially militarily through supplying weaponry. This was bullish for American defence contractors with Lockheed Martin (LMT.NYSE): and Raytheon Technologies (RTX.NYSE) two of the leading firms in the space.
The chart below shows the SP performance of the two entities with the eventuation of the invasion on 24 February 2022, providing a good exit with returns dependent on how early (brave) you entered the trade. This trade was also counter to prevailing market conditions, providing an even greater relative return.
Product/Service Specific
The shortage was due to the compounding of a number of issues:
- Historical import restrictions
- Supply chain disruptions due to Covid-19 (2021)
- Large scale recall and shut down of a factory of one of the three major US producers, Abbott Laboratories (ABT.NYSE), in February 2022
The recall would have had some special situation investors taking notice as that took things from difficult to crisis point.
Out of stock rates for IF are normally 10% but by the end of April had risen to ~30%; mid-May to 43% and 70% by the end of May. On 30 May 2022 BUB announced it had been granted immediate permission to import infant formula into the USA and had an agreement with the Biden administration to provide at least 1.25m tins. The share price rose 40% that day, providing an exit.
Note however, that A2M was in a down trend all year (also dealing with issues like a covid-exposed reliance on the Chinese market and Diagou trade and class action lawsuits) and by the end of June was 30% down from the start of the year. Special situations are certainly not risk free.
Summary
Finally, it’s important to keep in mind your thesis and realise your gains when the special situation plays out or, if it doesn’t, cut your losses.