Valero Energy Corporation’s (VLO) conservative valuation reflects a history of and expectations for cyclical margin pressures, secular regulatory pressures, and a management regime which does not create excess long-term shareholder value.
Management has singled out asset drop-downs to company sponsored MLP, Valero Energy Partners (VLP), as the most promising avenue for unlocking shareholder value.
Although the value gap between VLO and VLP is real, unless management radically accelerates VLP’s financing trajectory, the drop-down strategy will not significantly drive excess returns for VLO shareholders.
Disproportionate focus on arbitraging market value dislocations could detract from more enduring drivers of long-term value such as distressed asset acquisitions and continuous rationalization of core refining and logistics assets.
VLO’s core refining assets are among the best positioned and most complex in the world. If competently utilized, these assets are worth significantly more than the company’s market capitalization.
On Monday, 23 September 2013, “Kingold Jewelry (NASDAQ:KGJI) was downgraded by analysts at Thomson Reuters/Verus from a buy rating to a hold rating”, according to Zolmax News. The shares closed at $1.73 on Thursday 26 September, up 25% on the day, and up 40.6% from Monday’s close of $1.23.
These kinds of anomalies are pretty rare; living proof of the fallacy of instantaneous market efficiency. But as a wise woman once said, contradictions do not truly exist; “Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong” (AR).
A lone Chinese female investor, Xingmei Zhong, d.b.a. Full Alliance International Ltd., finalized its plan to buyout all outstanding shares of YONG for $6.69 per share in cash. The deal is expected to close at the end of the first fiscal quarter of 2014 (i.e., between October and January). The buyout price reflects a 40% premium to YONG’s market price ($4.79) as of the date of the announcement on 12-Oct-2012.
At $6.25 per share, the buyout represent a 7.04% premium to market price. Investor’s looking for a relatively low-risk return on investment can engage in a risk-arbitrage trade. Investors can buy YONG now and will likely realize the differential between market and buyout price within 3 to 6 months. At the present, one could realize a 29.18% annualized return if the deal executes in 3 months; 14.20% if the deal executes in 6 months.
In this post, I present a case that alpha can be gleaned from publicly available SEC Form 13-F data. Traditionally, pundits looked at commonalities in institutional top-holdings by dollar amount. Research suggests that these aggregated top holdings among many institutions can be indicative of their “best ideas” (1). That may be all good and well, but common sense indicates that the best leads should come from a good institution’s top holdings per unit of capacity. For my institution, I use RenTec because:
a.) they are quantitative and therefore it may be easier to find commonalities in their holdings; and,
b.) they have consistently delivered exceptional returns.
I believe that their “best ideas” should be those positions in which the position size is largest relative to capacity because a moderately-sized holding for a small float stock is much more indicative of expected risk-reward than a relatively much larger position in a relatively much larger float stock. Additionally, focusing on a single institution (rather than many) allows us to ask the all-important “why” by determining if there are any commonalities in their top holdings. Understanding the “why” might us allow us to move beyond “piggybacking” off of quarterly 13-F data, and understand what drives the decisions of the best in the industry. I argue that if we can deconstruct some of the decision-making criteria, we can use this for finding our own unique source of alpha.