A successful investing strategy often flies in the face of conventional wisdom and puts the investor opposite the expectations of the general public. Such is the case with my recent purchase of Bear Stearns (NYSE:BSC).
Bear has been in the news spotlight the last few weeks as two hedge funds it is affiliated with have come under intense pressure. The funds invest in Collateralized Debt Obligations [CDO] and are fairly leveraged vehicles. The more risky of the two reportedly raised $600 Million and then went out and used that to borrow an additional $6 Billion to invest. The company used the investments as collateral to secure the loans and now that the collateral is valued lower, lenders such as Merrill Lynch have threatened to pull the collateral, sell it in the market at drastically lower prices in order to get out of their predicament.
In steps, BSC saved the day. The company has graciously offered to put up $1.6b (and possibly as much as $3.2b) as collateral to bail out the funds. The stock has been hit hard on the news and speculation is abundant that this could be a very damaging move for BSC. Some have even suggested that this could put Bear out of business and others speculate the stock will be pushed so low as to make Bear a sure take out by another brokerage.
If you look back at the history of Bear, you see a few key differences between the company and their counterparts across the street. Bear may not be as talented at attracting the individual assets like Merrill Lynch, they play a smaller role at incubating new funds than Goldman Sachs, and their investment banking doesn't do nearly the volume of Credit Suisse. However, the company does an excellent job of managing and investing its own capital. The corporate culture still reverberates around making positive returns on assets and traders are meticulously trained to manage risk, and build the company's asset base by seizing opportunity.
This bailout is just that... An opportunity for the company to issue a loan (they are being compensated for the risk they are taking) and make a good return on their money. I picked up a position in BSC calls and expect this wave of selling to be just about over. I would not suggest putting too much capital at risk, but the chances of a rebound are good, and the size of the move is potentially very exciting.
Disclosure: Author has long position in BSC
BSC 1-yr chart
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