Fat Pitch Financials Contributor’s Corner Review

As I’ve mentioned previously, I have been enjoying a free trial courtesy of George of Fat Pitch Financials Contributor’s Corner and here is my review.

Basics
The main premise behind Contributor’s Corner is to provide “arbitrage and special situation opportunities in the stock market for small time investors.” One of the more common examples of this is a company trying to “go private” by buying back all the existing publicly traded shares.

For example, let’s say BigBob Enterprises (BOB) has 100,000 shares currently trading at $9.00 each. If it wants to go private, it has to buy back all the shares at a price that the current shareholders as a whole would approve. So maybe it files with the SEC that it would like to buy back at $10.00 a share, giving the potential for profit.

This is all very simplified, as the process of going private involves a lot of paperwork, negotiating, and a lot of internal politics. It can takes several months of waiting at times. During this process may either fall apart, or the buyback terms may even change. You could have bought a $9.50 hoping for a 50 cent profit per share, but then they decide to only pay $9.25. Oops. Or it could go through smoothly.

Personally, the judging of the probabilities of the transactions going through is the hardest part. So I saw a lot of possibly profitable arbitrage opportunities come and go because I wasn’t comfortable pulling the trigger. Finally, I found one that seemed worth a shot:

My Experience
I was really looking for something relatively safe, yet with still a good profit potential. I really wasn’t interested in going for an upside of 5% return if the downside was 10% or more. I settled on Advanced Nutraceuticals (ANII), now Bactolac Pharmaceuticals (BTCP.PK). I wrote about my reasons for participating in this post: Bought 499 Shares of Advanced Nutraceuticals, right after I did it myself.

Short version: Overall a reverse stock split, but for those with less than 500 shares, they are offering to pay $4 a share. I bought 499 shares at about $3.43 a share.

Partially because other sources had picked up on this, and maybe partially because *I* wrote about it too, lots of people starting buying exactly 499 shares of ANII. This actually caused problems, because they didn’t expect to need to buy back so many shares! Some uncertainty followed, but I stood pat, partially due to laziness and partially because I felt that the ‘powers that be’ really wanted to make this share-shrinkage happen, and an extra couple million dollars in financing wasn’t going to deter them. Again, no hard data.

In the end, the transaction was approved by shareholders and on October 5th the money showed up on my brokerage account, minus a $25 reorganization fee charged by Scottrade. Here are the numbers:

7/27/06 – Bought 499 shares at $3.43 = $1713.60 (no commission as I had some free trades)
9/13/06 – Shares disappeared out of my Scottrade account
10/5/06 – Cash received: $4 x 499 = $1996 – $25 fee = $1971
———————————————————————-
Overall return: $257.40, or a 15% gain in 40 days

I have no idea how to measure the risk on this transaction, so I can’t really compare risk vs. return.

What I’m Glad I Didn’t Buy
That was an example of a pretty successful opportunity, but I think I should also point out one that didn’t go so smoothly. That is the story of Parlux Fragrances (PARL), which makes designer perfumes like Paris Hilton’s ‘I’m Freaky Rich’ or something…

Long story made short, they announced that they received a ‘going-private’ buyout offer at $14.50 per share. The price then was about $9, giving room for a lot of profit. It looked good, then not good, then better, then worse, and finally the buyout offer was cancelled. Lot of shadiness in the deal, including possible insider activity. PARL is currently trading at $5.70, up from a low of $4.43. So you could have lost around 40-50% of your money.

I don’t say this to suggest that I was a frickin’ genius for avoiding it, on the contrary – I very well might have bought and have lost money on this had I not pretty much overlooked it.

Overall Conclusions
Contributor’s Corner provides a large, extensive list of these types of transactions for $10 per month, or for a limited time $90 a year for access. Obviously, some are good, and some are not. It does not hold your hand and say “buy shares of XXX” or “you should wait for a price of XX.XX”. It gives you information, from which you have to then decide your own actions. As you can see, these transactions are not a completely free lunch. Maybe more of an often discounted, but occasionally overpriced, lunch. Watch what you eat :)

There are a ton of small things about these transactions that I still don’t get. If you are a beginner investor like me, you tend to tread lightly and try to get a feel for what is what. Most of the time, this involves waiting for George or another established community member to jump in first. Unfortunately, this usually means less profit for you. For example, I think George got ANII for $3.10, a significantly better price that got him 64% more profit than me. Still, if you have the patience and willingness to learn (and some $$ to risk), this may just be your cup of tea.

However, if you know about and like to do these transactions, then Contributor’s Corner is doing a ton of work for you at a bargain price. Every day there are multiple updates on all kinds of transactions. I don’t know about you, but scouring SEC filings is not my idea of fun.

Comments

  1. The risk is that you could have easily lost your entire investment. I got very nervous the day I saw the news report that said there was a “problem” with the deal. If the cancelled the deal the stock would have probably dropped by a dollar or two.

    With high-risk propositions you shouldn’t be surprised when you have an occasional 100% loss.

  2. Hi Jonathan – Hadn’t read an update on your job situation in awhile – are you still working for that company or are you back to full time blogging/consulting work? Curious since you continue to have very healthy monthly net worth gains.

  3. Well, maybe not 100% of it, but yeah, I could have lost a lot. That company specifically was profitable and had a reasonable P/E ratio, though. Definitely judgment is needed in this arena, it is not as easy as applying for a credit card to get the bonus or moving to your money to a bank with higher interest rate. I think that’s why I like doing that better :)

    I’m late on putting together my monthly update, amongst many other things :oops:

  4. I have done a few of these with some modicum of success. One thing to avoid is the reorganization fee. Ameritrade charges $20. Schwab doesn’t charge anything.

  5. Nice writeup. I also participated in ANII and came out with about a 15% return. That includes the $9.95 commission charge for buying the shares but no extra fee for the reorganization (I used Schwab).

    You’re right in that it seems you need to pick and choose from among all the potential going-private-type transactions out there, and reading the proxy as well as following all the subsequent news is also a must. When the deals work out, the dollar amounts are small, so it might not be the right type of investment for everyone. But sometimes you can get a nice deal like ANII. Hopefully there are more to come!

  6. As an update, Scottrade reversed my $25 charge, as it was a mandatory reorganization.

  7. I like your honesty Jonathan, and you should give yourself more credit. Your a lot smarter than most folks. You have a valuable asset in MyMoneyBlog, and you tell it like it is… very commendable.

    You see why I don’t do business with Scottrade? That $25.00 reorganization fee is bull****, probably partially instituted by my complaints of their ineptitude to the SEC. You won’t get that charge with Vanguard.

    Also, don’t sell PARL too short. The CEO is a megalomaniac, but he knows what he’s doing, when he’s not flying off the handle. I recommended PARL to everyone a few years ago when it was trading at around $2.50/share. They said the exact same things about the CEO back then, but the company prospered. Given time, the same will happen again. Hmmm… maybe something to write about on my blog.

    Mike

Trackbacks

  1. [...] My Money Blog recently took Fat Pitch Financials Contributor’s Corner for a test drive. Read about how he turned a $1713.60 investment into $1971.00 in 40 days using an investment listed at Fat Pitch Financials Contributor’s Corner. [...]

  2. [...] free trades, I decided to buy these with my Scottrade (review) account because I have used them for similar arbitrage transactions in the past and I have a few free trades available from their referral program. I will need to contact [...]

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