This is a market for special situations and merger workouts. I find myself attracted these days to situations like Seritage and Activision Blizzard. Nothing is ever a sure thing, but it feels good getting into these kind of situations where nice returns are likely when everything else seems to be going down. And these special situations and merger workouts can often provide more than nice returns, they can actually provide amazing returns.
To show how high the annualized return can be from special situations and merger workouts, I’d like to look back on my recent 5-day investment in Continental Resources where I got over a 130% annualized return.
I bought Continental Resources on Thursday October 13th, and I sold my position on Monday October 17th.
I bought Continental Resources for three reasons:
a) I’m bullish on the price of oil, and I am cloning Warren Buffett’s Chevron and Occidental Petroleum oil bets by purchasing other oil companies.
b) I liked the way Continental has been run, their assets, the price Mr. Market was quoting me, and I got good insight into the business and how cheap it was from Value Line.
c) And the catalyst for my decision to invest was Harold Hamm’s June 2022 offer to take Continental private at $70/share.
Hamm and his family own 83% of the company, and his offer was to buy the remaining 17% from shareholders at $70/share.
I thought about investing in Continental for awhile after Hamm’s offer (more on this delay and what it cost me later), and I finally got around to investing in Continental on October 13th once I realized that there was a generational opportunity with oil companies sitting right in front of me.
I bought Continental on Thursday October 13th at $69/share.
I sold on Monday October 17th at $74/share.
The reason I bought Continental is because I thought it was an asymmetric opportunity.
Heads I win and the deal goes through at a higher price than $70 or the deal doesn’t go through and I get to hold Continental in a high oil price environment after purchasing it for a price I was happy with.
Or tails I lose and Hamm gets to buy my shares at $70 and I get a 1% gain and essentially break even, which would be just fine as a downside scenario.
It ended up working out, and working out quickly.
News came out midday on Monday the 17th that Hamm and the board had agreed to $74.28/share, and that was that. I checked the stock price, it was $74.06, which was good enough for me, and I sold.
In plain numbers, this was around a 7% gain. But that doesn’t factor in time. The annualized return of this investment was well over 131% since my holding time was so small (my calculator can only factor in a tenth of a year as the smallest time period so the actual annualized number is higher).
Many people don’t seem to care about “only 7% returns” like this, but I do. I understand the power of compounding, and I understand the reality of annualized rates of return. This was well over a 130% annualized return on investment, and it was a beautiful asymmetric bet, which are the best kind.
My instincts were right about this one, but my lack of experience made me cautious and I only put down a 5% bet. In the future, an asymmetric, no-brainer, high-confidence opportunity like this will be taken advantage of to a much larger extent.
The other mistake I made was not jumping in fast enough. Continental closed at $62.65 on September 26th, and it also traded in the mid-$60’s in July. If I had bought earlier, then I likely would have bought even more when the stock traded under $65 and I could have increased my return.
Situations like Seritage and Activision Blizzard excite me, and I like how special situations and merger workouts can compliment a portfolio composed primarily of long-term growers. I’ll be following both of those situations closely.
As for Continental Resources, the deal is expected to close by December 31st, but if for some reason the stock starts trading down at $73 or lower, I might get back in.
And if you’re interested in merger workouts, I recommend Warren Buffett’s Ground Rules by Jeremy Miller. That book is where merger workouts started to click for me.