Denali Investors

Denali Investors: Spring 2010 Special Situations Investing [Slides]

Denali Investors: Rice University / Jones Business School – Spring 2010 Special Situations Investing

Denali Investors – Simple Framework

Survival Investing

Survival = Value + Spec Sits + Options

Investing = “Art + Craft + Science”

Respect Micro + Macro + Cycles

Portfolio Construction



  • Undervalued stocks
  • Neglected
  • Long time horizon
  • Favorable risk/reward


  • Flawed business, management
  • Unrealistic expectations
  • Negative catalysts


Special Situations

  • Non-recurring; Catalyst
  • Internal/External
  • Mergers
  • Tender Offers
  • Spin-offs
  • Capital Structure Arbitrage
  • Reorganizations
  • Liquidations
  • Bankruptcies

An exceptionally flexible search for opportunities…

What Would Buffett Do?

  • No system can guarantee success
  • Markets can be unforgiving

Denali Investors

Yet investing doesn’t need to be anxiety ridden.

Be able to pick your spots and roll with the punches.

A Fundamental Question

The Risk-Return Relationship

  • Show of hands – What does the Risk-Return Relationship look like?

Denali Investors

Case Study #1

What do you get when the following get together?

  • An industry no one wants to touch
  • Two industry leaders
  • Sandbagging management
  • A catalyst

Cardinal Health’s SPINOFF of CareFusion


Buy ParentCo, and get SpinCo for very cheap

Deal Background

  • Summer 2009 – CAH was trading at $30 – $31 per share
  • CAH was still expected to close the spin in Q3 2009

Denali Investors

Mr. Market says NO to healthcare for various reasons…

Cardinal Parent (CAH)

  • The new CAH is now organized into two segments.
  • The Pharmaceutical Segment, which accounts for 2/3 of profits, includes pharmaceutical distribution, manufacturer and specialty services, and nuclear and pharmacy services.
  • The Medical Segment, which accounts for 1/3 of profits, includes medical product distribution, lab product distribution, and infection prevention products.
  • Pharma Distribution is an industry in the final innings of consolidation in which the top three players (CAH, MCK, and ABC) have 90% market share.
  • Outlier in distribution economics…

CareFusion Spinoff

  • CFN is another industry leader with attractive metrics and margins and additional room for upside in fundamentals.
  • CFN offers product lines in the areas of IV infusion, medication and supply dispensing, respiratory care, infection prevention and surgical instruments – a razor/razor blade model.
  • The industry has a longer runway and is quite fragmented and under penetrated.
  • Demonstrated maintenance of pricing discipline and expressed desire to continue to grow organically.

See full PDF below.


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