Update on special situations investing: Advanced Nutraceuticals (now Bactolac Pharmaceutical)

Value investing

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As you might recall, last month, I decided to sign up for to learn and experiment with a different type of value investment called special situations investing, or workouts. For those who don’t know, George (the creator of Fat Pitch Financials) does a tidy job of researching and listing public companies that are soon to undergo mergers, go private, make tender lot offers, and other “special situations” where there’s some money to be made through a paid subscription service of $10 per month or $90 for the year. I decided to sign up for 3-months’ worth to start.

Before I left for Spain, I decided to purchase 499 shares of Advanced Nutraceuticals (ANII.OB, now ) at $3.46 per share. ANII was planning to turn private via a reverse split on September 8, 2006. Under the proposal, any shareholders holding less than 500 shares would automatically receive $4.00 for each share, assuming the proposal was approved.

All this data was conveniently provided on George’s site at the Contributor’s Corner, but I still read through the preliminary filing and proxy to make sure I was comfortable with the purchase. When investing in these situations, it’s important to keep abreast of SEC filings, news, and submissions. In fact, just last week, there was an announcement from the company that put in doubt that the transaction would go through, but information appearing today seems to show that .

For anyone interested in special situations investing, I encourage you to check out George’s posts on the topic. To summarize, here’s a list of things I did before deciding to give this type of value investing a try (again, most of which I learned from reading Fat Pitch Financials), as well as specific steps I took after buying ANII:

  1. Read up about , especially focusing on what’s involved, what risks there are, and how things work, in order to decide whether this was right for me
  2. Signed up for George’s Contributor’s Corner
  3. Contacted (my broker) to find out potential fees and costs, including tender offer fees, extra commission charges for stocks selling below a certain $ (if any), reorganization fees (both voluntary and involuntary), and the process for registering shares in your name, including how it’s done, how long it takes, and how much it costs (also known as stock certificate fees).
  4. Put in a good-til-cancelled limit order to purchase stock in the company in question (in this case, ANII). Note that most of these stocks are very illiquid, and it might be several days before limit orders are executed. For ANII, I had originally entered in a price of $3.41 but decided after a week that I needed to up the order to $3.46 in order to get my order filled, making sure that at that price and after all potential fees, the return was still attractive.
  5. After my purchase order was filled, put in a good-til-cancelled limit order to sell ANII at $3.98. This order ultimately didn’t get executed, but because once in a while the stock of a company who’s planning on going private will rise to nearly the exchange price per share, it might be worthwhile to sell the stock at that price for a sure gain rather than wait for the going-private transaction to go through, since this can sometimes take up to several months.
  6. Used (a free service) to set up an email alert whenever anything related to ANII was submitted. I received several alerts over the next few weeks showing directors who purchased and sold shares of ANII. (As a general rule, insider sales may indicate that the going-private deal may not go through, and vice versa for insider purchases.)
  7. Monitored the forums and comments on ANII on the Contributor’s Corner from time to time to learn opinions and news on ANII that I might have missed, and read up on any amended or new documents that ANII submitted

Until I see the money in my account, I won’t consider ANII a done deal, but so far, it’s been pretty smooth sailing. Just in case you’re wondering, I don’t receive any benefit from plugging George’s service, but I thought it might be of interest to others out there who haven’t heard of this type of investing before. (If you’re curious you can also check out how he’s fared by checking out his model portfolio.)

In general, the monetary amounts involved in these sorts of investments are small, and the transactions’ setup makes it very difficult and of little interest to large, instutitional investors, thereby creating a very rare situation where individual investors have most of the advantage. When they go through, gains are usually also short-term and therefore most suitable for tax-exempt or -deferred accounts.

It did puzzle me a little as to why these companies’ stocks don’t rise to their share exchange price (thereby removing this type of arbitrage opportunity), but I can only conclude that the market for these stocks is very inefficient: most people don’t know about these companies, or that they’re going private, or how this works, or that there’s money to be made. And at the same time, each purchase is limited by the fact that each shareholder must be unique and hold less than the upper limit of shares in order to qualify for the reverse split.

Now that I’m back, I plan on reviewing the other transactions listed at Contributor’s Corner to see if there are others that I would like to invest in. More updates to come!

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