The Manual of Ideas: The Proven Framework for Finding the Best Value Investments

CHAPTER 8

Special Situations

Uncovering Opportunity in Event-Driven Investments

Simplicity is the ultimate sophistication.

—Leonardo da Vinci

So much to discuss, so little space. This sums up our predicament in this chapter, as the sprawling topic of special-situation investments can hardly be confined to the available pages. That said, if we succeed only in demystifying the subject and sharing a few overarching thoughts, you may find it a bit easier to progress on the path toward acquiring expertise in the special situation categories you find most intriguing. Kenneth Shubin Stein, portfolio manager of Spencer Capital Management, frames the topic as follows: “For us, special situations run the gamut from companies that are in distress, in bankruptcy, are in turnaround situations, companies that are doing spinoffs or debt recapitalization or large share repurchases or are experiencing significant short-term events that are impairing their earnings power but don't impair the long-term intrinsic value of the company.”¹

Framed even more broadly, special situations encompass equities whose near- to medium-term stock price performance is largely independent of the performance of equity markets in general. In this context, stock price performance refers to the total investment return, including dividends, other cash payouts, and noncash value that may accrue to investors. Notice we refer neither to the performance of the business itself nor to long-term performance. Business performance, ...