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
“Generals”
Longs
- Undervalued stocks
- Neglected
- Long time horizon
- Favorable risk/reward
Shorts
- Flawed business, management
- Unrealistic expectations
- Negative catalysts
“Workouts”
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
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?
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
Thesis:
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
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.
