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  • Pair Trade: Long FIG, Short KFN 0 comments
    Jun 16, 2010 10:23 AM | about stocks: KKR, FIG
    Today's Pair Trade: Long FIG, Short KFN

    It appears as if KFN is eager to raise cash as it looks for potential acqusitions available in the market. In early May, KFN announced a secondary offer of 25 million shares (with the option to purchase an additional 3.75 million). However, just three days later, they announced that they were no longer proceeding with the common shares offering citing unfavorable market conditions and recent volatility. It is reasonable to expect that KFN will eventually move forward with this common stock offering when they feel market conditions are more favorable.

    Also, recently announced is the IPO of Neilsen, a "worldwide giant of media measurement and consumer behavior research." Neilson was taken off the public markes in a $10.2 billion LBO in 2006, and is now being going public again with funding from seven PE firms, including The Blackstone Group, The Carlyle Group, Thomas H. Lee Partners and KFN. KFN, along with the rest of the group, will sit on most of the shares after the  $1.75 billion IPO, betting that the share price will increase.

    While Neilson is a stable, profitable company, there are no guarantees that the IPO market will react favorably to this offering merely by its fundamentals. The risk of a double-dip may impact this (and other) IPOs ability to raise the level of funding desired.

    There are also concerns that the move towards digital cable, satelite TV, and perhaps now Google TV, could pose risks towards Neilson's revenue and revenue growth. Neilson's ability to collect, interpret, and resell viewership data may be easily replicated by companies like Comcast, Time Warner, DirectTV, Dish, and even Google.

    KFN has had an enormous runup in the past year, with a 52-week range of $0.75 - $9.49. It currently trades at $8.39.

    Jim Cramer recently mentioned that KFN may qualify as he "Spec Stock of 2010" citing that "in this 'crazy' market dividends offer much-needed protection, so investors should seek them out, even when speculating. And KFN, presently yielding 5%, offers that protection." Cramer's reiteration helped move the stock upwards.

    The CEO also recently purchased $50,000 shares of KFN.

    Last month Goldman Sachs upgraded Fortress Investment Group to 'Buy' from 'Neutral' with a 12-month price target of $7.50.

    "At current levels, Goldman believes FIG's valuation is not pricing in potential performance fees, even though the firm is getting close to its highwater marks. Specifically, FIG trades at just over 6X 2011 P/E versus OZM at 7.7X and BX at 10.7X . Adjusted for the firm's investments, FIG's EV/AUM is 5.7% on 2010 AUM estimates versus 9.5% for BX and 24.8% for OZM – a level which they believe does not price in much more than FIG's sticky management fees and on balance sheet net cash and investments. Said in another way, using the value of management fees and on balance sheet investments plus cash (net of debt) as the "floor" value for alternative managers, the firm sees the least potential downside for FIG."

    FIG is also self-proclaiming itself as a "financial services industry garbage collector" as they eagerly purchase distressed assets from failing banks. Pete Briger, co-chairman claims "the classic distressed debt business is going to be one of the world's great opportunities." While banks and lenders are continuing to eagerly shed these "toxic assets," FIG is buying up all it can get on the basis that these assets may be selling too far below value. It is also possible that banks and lenders are looking to rid themselves of these assets to shore up their balance sheet and improve liquidity ratios.

    Statistical Commentary
    Below is a graphical representation of this pair trade (Long FIG, Short KFN).

    As you can see from the graph, this pair is trading quite far from the 20-day MA. Notice how in the past six months the pair has consistently hovered near the mean; or, if it deviated strongly from the mean, it quickly and sharply returned to a level more in-line with the mean.

    At its current level, the pair is trading 2.04 standard deviations from the mean, which is in the 3.85% percentile. This is very low.

    If you believe in the principles of statistics and mean convergence, it is reasonable to expect that this pair will return to its mean level (~$0.50 currently). If this occurs, both the Long FIG and the Short KFN will have been profitable.

    Good luck,

    The graphical representation of the this pair was generated from the Pair Trading Tool at Catalyst Corner. Both the Pair Tool and site membership are completely FREE.

    Catalyst Corner is a financial website that provides FREE in-depth researchs on comapnies with significant milestones or "catalysts" coming up in the near-term.

    Disclaimer: The information disseminated by Catalyst Corner ("Catalyst", "us", or "we") is for informational purposes only, and is neither a solicitation to buy nor an offer to sell securities. We do undertake or purport to render any investment advice or recommendations for the buying and selling of securities. 

    Disclosure: No positions
    Stocks: KKR, FIG
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