Screening For Bill Ackman's Mystery Trade

Includes: MBI, STAR, SVU
by: Jonathan Selsick
As reported on CNBC, Bill Ackman in his August 17 letter to shareholders hinted at the possibility of a hugely profitable trade in the pipeline. The relevant excerpts from CNBC follow.

In the past, we have made asymmetric investments which are not for hedging purposes, but which also offer large payoffs on relatively modest commitments of capital where we similarly believe that the market has mispriced the probability of a positive outcome .... We recently identified an investment that broadly falls into this category. We expect that we will be able to share this investment in greater detail in the upcoming months .... It is both an attractive standalone investment and one that offers significant hedging benefits for our portfolio. For a modest amount of capital commitment, this investment offers the potential for extraordinary profits.

With these clues in hand we set about building our screen to determine what he's talking about. It is not a derivative, but an actual company. I would consider $150-200 million modest for Pershing, and based on taking a 10% position, that would limit the market cap at around $2 billion. We screened for market cap of between $300m and $2 bn. It's most likely already highly leveraged to achieve the upside kicker on the equity. We screened for an enterprise value of greater than $5 bn. This would imply at least 2.5x leverage based on our maximum market cap requirements. If there is a lot of skepticism about the company’s future, then it likely has a high short interest ratio. We screened for a short interest ratio of at least 5% of the float. Ackman compared it to General Growth Properties (NYSE:GGP), perhaps in the sense that it was a sub-$1 stock that was close to bankruptcy. We screened for stocks below $10.
Based on the screen, we came up with three names.
Click to enlarge

All three have a significant real estate component. Ackman is a real estate guy at heart and seems to like buying operating business where he can acquire valuable real estate indirectly. Ackman’s reference to the significant hedging potential of the investment, could be interpreted as being inversely correlated with a company's existing assets, or perhaps hedging in the form of diversifying exposure to a specific asset class. Using the latter assumption, all three might qualify in some way, but it’s a little harder to argue. As an activist, we might assume that active intervention is required to unlock value; however, if as Ackman stated it is attractive as a standalone investment, perhaps active intervention is not anticipated in this case.

I think all three fit the bill for Ackman and offer the possibility of asymmetric returns, but the “significant hedging” criterion is questionable. He has a history with shorting MBIA (NYSE:MBI) so he knows it well. If I had to pick one, my favorite pick out of these three is SuperValu (NYSE:SVU), which is an out of favor supermarket stock that has seen its value significantly eroded over the past five years. The company has annual revenues of $37 billion and trades at EV/EBITDA of 4.44x. While SVU's traditional supermarket properties have been a drag, SVU's Sav-A-Lot dollar store concept has about 1,200 stores and is growing rapidly (SVU expects to double the number of stores by 2015), and SVU's distribution business is healthy. The company owns approximately 24 million square feet of real estate. An improvement in SVU's traditional supermarket business would make this a home run.

Disclosure: I am long SFI, SVU.