Special Situation Investing In Secondary Offerings

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The Latest Trend In The Stock Market And How To Profit From It by TMFDeeJ aka Jason Knapp.

Successful investing is all about trends. Whether you are a growth investor, a dividend investor, a value investor or a special situation investor like myself consciously or unconsciously we're all looking for trends in the market that will cause certain stocks to rise. By that, I mean similar characteristics in companies that lead to market outperformance. Once one finds a profitable trend in the market, they should exploit it over, and over, and over until it no longer works.

I did this several years ago with Master Limited Partnership IPOs. In my daily reading about the stock market, I noticed that MLP IPOs were on fire. It didn't even really matter what the company did, if it had a halfway decent yield and was new its stock soared. This trend was likely the result of investors looking anywhere possible for yield in a zero-interest-rate environment. I wrote about this trend several times in my previous blog over at The Motley Fool, including these articles from mid-2012:

MLP IPOs have outperformed the S&P 500 by 35% over the past five years! and An Update on the MLP IPO Experiment

For a period of several years I was able to exploit this trend to make a decent amount of money both in real-life and in points in my on-line special situation investing portfolio.

Flash forward to today and the MLP IPO effect has faded somewhat, but a new trend has emerged.  The pendulum has swung in the completely opposite direction. Everyone is so convinced that interest rates are headed higher soon and that higher rates must be bad for stocks with high dividends or distributions like MLPs and REITS.  As a result, investors are fleeing the sector, selling REITs and MLPs first and asking questions later. Yesterday I debunked the myth that rising rates are bad for REITs. This chart says it all:

In four out of the six periods where rates went substantially higher, REITs were actually positive. And in three out of the four positive time frames they showed outstanding performance.

I have been looking for opportunities to buy into REITs and MLPs as they sell off. Nothing crushes these stocks more than secondary stock offerings. In a good market environment for these sectors, stocks usually sell off when they announce a secondary offering, but now they're really getting hammered.  In my daily perusing the list of the worst-performing stocks on the market, time and time again REITs and MLPs that have announced secondary offerings are popping up.  Secondary offerings at some companies may be dilutive for investors, but investors need to understand that they are a necessity for REITs and MLPs.  Without secondary offerings, these companies cannot grow. By law REITs and MLPs are required to pay out a substantial portion of their cash from operations to unitholders.  As long as a company's management uses the funds from a secondary offering for intelligent acquisitions, they are actually a great thing for investors.

Two days ago I wrote about a company, Azure Midstream Partners, that sold off more than 10% when it announced that it was issuing stock to make an acquisition, yet the purchase produce enough cash flow to enable the company to keep its yield at a massive 10.8%, see Secondary Offerings at MLPs Often Present Fantastic Buying Opportunities .

Yesterday I wrote about a similar situation at CorEnergy Infrastructure Trust. CorEnergy issued new shares of its stock, which costs it 8% to purchase an asset that yields 16.5%.  I would do that all day long.  The new assets that the company purchased it will enable it to immediately raise its dividend by 11% to a whopping 9.8%. Yesterday's post, This Unusual REIT's New Acquisition is a Game Changer.

This is just the tip of the iceberg.  Today I present two quick look at two more companies that have used secondary stock offerings to make intelligent acquisitions.

Over the past two days, the stock of a REIT called New Senior Investment Group fell over 13% on news that it was issuing new stock to purchase a 28-property portfolio of private pay, independent living senior housing properties from affiliates of Holiday Retirement for approximately $640 million.  The portfolio makes $SNR the premier private pay senior housing company on the market, a nice position to be in a sector with tremendous demographic tailwinds.  Not only that, but it is immediately accretive to the both Company’s adjusted funds from operations and funds available for distribution to investors. See here for some additional reading, New Senior Announces Agreement to Acquire $640 Million of High-Quality Senior Housing Assets.

Similarly, yesterday the stock of an MLP called GasLog Partners LP which sports the hilarious ticker symbol $GLOP dropped on news of a secondary stock offering as well.  GasLog is using the proceeds from the transaction to purchase three new liquefied natural gas transport ships, the Nina, Pinta, er um I mean the Methane Alison Victoria, Methane Shirley Elisabeth and Methane Heather Sally in a drop-down transaction from its general partner for $483 million.  Once again, this transaction is immediately accretive for GLOP and it "is consistent with the strategy to grow cash distributions for the unitholders through accretive dropdowns and third-party acquisitions." 

Many investors call themselves contrarians, but when the chips are on the table and stock in a company that you own is temporarily moving against you it takes some pretty big stones to sit there and take it or to add to your position.  I have been adding to my REIT / MP positions and establishing new ones on selloffs after secondary stock offerings lately.  I have a strong feeling that doing so will ultimately prove to be very profitable.  I plan to keep my eyes peeled for similar situations going forward.

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