Is This The Dawn Of A New Age For Active Managers?
He has reduced all the beauty of the world to a small pickled fish. -- Diane Keaton, complaining about her herring merchant husband, to Woody Allen, in Love and Death.
Two weeks ago Alere, a point-of-care medical diagnostic company, was trading at $38.00. Abbott Labs was contractually obligated to buy Alere at $56.00 a share unless they could prove that Alere’s business had deteriorated materially since they first made their offer in February of last year. Delaware courts, however, had never before allowed an acquirer to get out of an acquisition agreement based on the material adverse change clause. So how could the spread between where Alere was trading and where it was supposed to be taken over have been this wide?
All the beauty of the world of investing can be reduced to risk and reward. I do not argue that the Abbott-Alere deal was a lock to go through at $56. There are many sound reasons why Abbott thought they had a good chance of getting out of this deal. (Link Here)
Nonetheless, the spread should not have been this wide. In an efficient market, a decent chance for a 30 percent return in one month’s time should have attracted more capital, and therefore a lower return.
But this is no longer an efficient market. The recent outflow of billions of dollars from hedge funds and other active managers is increasing the potential return for those that remain invested. Before this great financial exodus there was too much money chasing too few opportunities. But now, as the Alere opportunity of two weeks ago would seem to indicate, there are more interesting investment opportunities available for contrarian investors.
It's a Wall Street story as old as time. Good returns attract capital. Too much capital destroys the good returns. Capital flees. And then come the good returns.*
And that's why I’m a contrarian investor and always will be.
*I am sure my lawyers would like me to point out that I am not guaranteeing anyone good returns. I am merely pointing out a common investment cycle. The future is a mystery to us all.
The discussions and opinions in this post are for general information only, and are not intended to provide investment advice. Opinions expressed herein are subject to change without notice. The security discussed was selected due to the highly unusual market conditions including the wide spread and short duration to the merger. This information is not intended as a recommendation to buy or sell any specific security. At the time of this posting, Integre does hold shares of the security discussed. Past performance is not indicative of future returns. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Integre considers to be reasonable. Integre closely monitors its positions and may make changes to the portfolio’s investment strategy when warranted by changing market conditions. If a position’s underlying fundamentals or valuation measures change, Integre will reevaluate its position and may sell part or all of its position. There is no guarantee that, should market conditions repeat, these investments will perform in the same way in the future. There is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. There can be no assurance that the portfolio will continue to hold the same position in funds described herein, and the portfolio may change any portfolio position at any time.
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