Wednesday, May 13, 2009
(Cont'd from above)...

Jim (cont'd):   

I'm going to tell you what you need to know in order to try to make money off these deals... which seem to be everywhere these days... particularly the bank deals.

How can you profit from them in the midst of the worst selloff since the bad ole days, or "Ides", of March... Let me teach you about how I would approach them back at my hedge fund...

First of all, I would often buy stocks that I didn't initially care for... simply because I wanted to buy merchandise at a discount to hot market that had moved up very far, very fast... meaning a market a lot like this... and these giant secondaries gave me that opportunity...

Do you know that I care a whole lot more that I like the price where the stock was being offered than I did about what was being offered... because it was most likely going to be a "trade" anyway (versus a longer-term hold)...

A lot of the companies that are pretty ho-hum have done secondaries lately, in order to raise money to pay down debt, or to pay back the government, as is the case with the banks. And you could have made money in all of them (that offered secondary stock distributions)... I think that's a pretty compelling reason to learns the tricks this trade...

So you had better listen up, while I teach them to you, if you want to try to make money off these secondaries...

First off, I don't want to minimize the need to do fundamental analysis entirely. I would never, ever ever by the stock of a company that I hate, or a company whose management I don't trust... even at a discount. But, when the pricing on a decent, but expensive, piece of merchandise changes, I change my mind about the merchandise...

When the stock gets much cheaper, it makes sense to be attracted to something that I might not otherwise have been interested in.

So here we go... The case in point...

The 75 million shares of BB & T Corp. (BBT)... the regional bank... that priced last night at $20...

Now, if you watch the show, you know I'm not a big fan of BB&T... they've had a lot of bad loans... But you see, at a huge discount of 11% from where it closed the night before, and a whopping 25% discount to where it was just last week, I am all over BB&T like a cheap suit!... Or, more likely, like a cheap tuxedo rental, because there could be some quick money to be made here... and because it's prom season...

After we assess the discount to the last sale that we are getting, thanks to the secondary, we've got to check out the demand for the new supply of BB&T stock... not the fundamentals of the company... the demand for the supply...

I consider this like trying to get tickets to a play...

Is it hot enough?... If it's too hot, we can't get enough. Not interested. And, if it's not hot... and we can get all we want... hey, then we aren't interested... the play must stink. If it's just right... meaning the broker calls us and says that the big guys are coming in at this level, it's tight, and there won't be much around... then you know you've got something.

For this, though... to be candid... I have to rely on a full-service broker to help me out... one who does these kinds of deals. That's important. If you have that kind of broker, it's very hard to do this... See, they're the ones who can check on demand, and they can find what kind of buyers there are, and what's the demand... what's the interest... at this $20 level... They check with what's known as the "syndicate desk." When I worked at Goldman Sachs, and people wanted equity offerings, I would constantly be on the horn to the syndicate desk, bothering them about how good the deal is. If they lied to me, they'd know that they'd have to pay... I wouldn't sell more deals.

In this case, I understand that, if the broker priced the new shares of BB&T say, near the last sale... how about $22... a half-point below the closing price... there wouldn't be much interest... the play flops. If they priced it at $21, it would only be tepid and, more important, it would not be down enough to entice the short sellers of BB&T, to cover their short positions, and stop pressuring the stock down. And, make no mistake, the shorts have leaned heavily on this one because everyone who follows the banking crisis knew that BB&T would have to do a giant stock deal to appease the regulators.

So, play at $21... I don't know... maybe I'll stay home. Ah ha... but at $20 - a huge discount from the close - I want those tickets. Because I know the shorts will cover and the longs would have genuine demand.

If you were dealing with a full-service broker on this deal, I think he would have told you that... He would have said this one is tight as a drum... no flippers... meaning the only real buyers are large institutions who have pledged to hold the stock, and they're not going to kick it out the moment it starts trading...

You see, that's what makes this one tight as a drum, and forces the shorts to cover, because they don't think it's going any lower, and there's obvious huge demand at the $20 level...

Or, to put it another way... Priced at $20 a share, the shorts become your friends, not your enemies... they have to buy.

Even then... when we put in... we still leave a little behind, in case the secondary doesn't go as well as we think. We never buy all at once, even when it looks like you're getting in at bargain-basement levels... So, if we want 200 shares, say... we buy 100 BB&T on the print price at $20... and then we see if it breaks the print (i.e., goes below that price)... That often happens when a stock wasn't "softened" enough... a concept you have to think of in terms of World War I or World War II, when we "softened" the other side with artillery fire, before we charged...

The other side... the existing shareholders... have been so beaten down that the sellers should have dried up, and then the only people left owning the stock are diehards, comatose, buy-and-hold fanatics...

And finally, we want to be sure that, after the deal is priced and trading, the broker will support the bid by actually buying stock itself too, in what's known as "stabilize" the market... a technical term... stabilizing means you are trying to keep the stock at one level until buyers come in... Legal... it's legal... it's in the 34 Act...

In BB&T, the brokers left a huge amount to buy when the stock opened... something that's perfectly legal for them to do... Again, a full-service broker will tell you about that...

BB&T was "stabilized" better than almost all the other bank secondaries... as good as Wells Fargo (WFC), which I own for my charitable trust... and that one ran up 6 points after the deal was pressed.

In this particular case, our caution cost us... The deal turned out to be red-hot... priced fabulously... stabilized as all get out...

That means we only go to put half of our position on, if we got in on the offering... But, then again, I think that's a pretty high-quality problem since, at the end of the day, you made money, even if you didn't get a chance to buy more BB&T on the cheap... and making money is all that matters.

Here's the bottom line...

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