Skip to main content

The Correction (& Persistence) Of Anomalies

During dreary journeys across the market landscape scouring for interesting opportunities, the investor occasionally stumbles upon an oasis. Of extreme anomaly. The sighting is generally a mirage, a ray of false hope; but in some instances, the manifestation is very real and extremely intriguing, especially so when the anomaly manifests across companies operating in the same business.

The anomaly was first highlighted here ('Over-priced anomalies in bear markets'), when discussing One Life Capital Advisors (Bloomberg: OCAP IN). Extreme pricing is generally either an outcome of mass euphoria/fear, or a flock of informed market participant presence. OCAP IN seemed to be in the latter category. The post also highlighted the case of peer, Brescon Corporate Advisors (Bloomberg: BFS IN), as an example of under-appreciation. 

For brevity, the scheme of things as on the date of writing (Dec '11) is reproduced:

Such cases of extreme pricing always pique my interest. The situation seemed too far removed from reality. Diligence corroborated my hunch on OCAP IN's ridiculous pricing, and it corroborated my hunch of under-pricing in the case of BFS IN.

A mid-market focused investment banking, debt restructuring franchise with a reasonably long history of operations and respectable brand value seemed to be completely unloved. The company small size ($3.5 mm market value) and low liquidity were partly the reasons. Competition from investors scouring this market segment is limited and severe anomalies sometimes manifest, as a result.

BFS IN was available for far less than its cash and liquid investments (including equities), even after allowing for diminution in carrying value of these investments. Essentially, market participants were assigning no value to the business, a relatively reasonable operating history; a clear anomaly. 

As sentiment picked up in the first quarter of 2012 on the back of renewed FII inflows, stocks of under-appreciated companies come under the spotlight. BFS IN benefited from this surge in sentiment and currently trades at a market value of c.$7 mm, a 100% gain in a few months. The current market value is equal to its cash and liquid securities. Market participants continue to assign little value to either the business or its franchise, which is reasonably strong in its focus area. The margin-of-safety has since compressed but the example illustrates the minimal force that is sometimes required to effect a meaningful correction in anomalies.

On the other hand, the persistence of over-pricing is another intriguing aspect. OCAP IN continues to enjoy a market value of c.$70 mm - 10x BFS IN's market value - which, given its competitive standing, operational history, franchise value, business size, makes for an Alice in Wonderland situation. Shorting isn't the easiest in India but even if one could, the wait and weight of pain would be excruciating.
The principal risk in unloved companies is (1) questionable numbers/management, (2) the absence of a catalyst that could allow restorative forces to act with rigour. (1) is within the realm of known-unknowns and can be tackled to a reasonable degree. (2) is more sketchy. Sometimes, the catalyst takes so long materialising as to be virtually useless for value emergence. The catalyst in this case was an uptick in sentiment. But insisting on fat discounts to true worth allows leeway for unknown-unknowns that might afflict the company under consideration.

I'm watching this one closely, as I continue on my journey across the market landscape.


Popular posts from this blog

Book review: In the Long Run we are all Dead

In the Long Run we are all Dead: A Macroeconomics murder mystery The US economy faces a deep recession, raging inflation and an impending run on the dollar. President Wedik likes economics as much as a fish likes land. Should he listen to the Keynesians, who favour government intervention or the Monetarists, who favour market fundamentalism?

Unable to decide, he delegates the tough decision to his Chief of Staff, Admiral Harcourt Green. Green laboriously goes through the process of coming up with an economic policy package...only to be mysteriously murdered on D-day. Details of the economic package dies with him...
Something has to be done soon to avoid an economic collapse. What? How?
Who committed the murder? And why?
The murder story could probably have been constructed better but the crux of the book is economics! Recommend it to those looking for a light read on macroeconomics without running the risk of drowning in jargon.
In this delightfully light read, Wolfson & Buranelli, weav…

Halls of the Blind

I can see what you see not Vision milky, then eyes rot. When you turn, they will be gone, Whispering their hidden song. Then you see what cannot be Shadows move where light should be. Out of darkness, out of mind, Cast down into the Halls of the Blind. 

- Diablo

I usually avoid referring to stuff from the 90s as the opening act. It risks giving away my vintage…
But the above words from one of the most successful role-playing games from the 90s – Diablo – (who remembers it?) is apt for this edition.
Auditor Problems.
It’s an opportune moment to dive into the Corporate Halls of the Blind.
Indian markets have been beset by a sudden wave of auditor resignations from listed companies in recent times. Stock prices of the affected companies have taken a beating. Runaway auditors have caused market participants to speculate over the next defection, as alpha monkeys smell quick gains. Auditor issues have surfaced after a period of widespread price correction. Wounded consciences that were assuaged by …

The Strange Life of Abraham de Moivre

This edition is about a topic that fascinates me: bidding behaviour.
On how people make decisions under conditions of uncertainty. And the notion of ‘rationality’. *****  Many of you participated in a game I played with you recently. (I’m sure you are glad that I didn’t ask you to predict your expiry dates!)
An investment prospect offers 100% return potential over your benchmark return (your ‘required return’). How much of this excess return would you be willing to pay/share upfront to participate in the idea?
There were no right answers for this ‘buy in’. Only interesting answers.
Chart time.

Buyin for ‘50%’ represents 50% and above. Participants comprised of finance and non-finance backgrounds. The left bins generally had finance people; who opted for some variant of upfront fee and profit share structures. Many non-finance guys populated the higher bins. Interestingly, several finance folks populated the 50% and above bin. And I had some friends who were steadfast in populating the left mo…