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Long/Short Investment Idea

I stumbled across an article on Business Insider not too long ago that highlighted the health of a particular sub-sector within the food manufacturing business. The article prompted me to conduct my own fundamental analysis, and the results intrigued me. For anonymity sake and to simplify complexities - let us call the two largest players in the sub-sector: company "X" and company "Y".

Company X and Y have been in the food manufacturing business for decades. Combined, they make up roughly around 80% of the particular sub-sector market segmentation. Product differentiation across both companies is identical - however, company X is perceived to have a higher reputation amongst the general consumer (the company has had effective marketing strategies and PR stints for decades). Approximately 70% of both companies sales come from a single product. The cash-cow products' cost of sales is tied to one specific commodity - which is hard to produce, grows in a particular geographic location, environment, and month. There is an alternative to the commodity that is currently being tested by the FDA - but approval will take years to come, and manufacturing the synthetic commodity in mass quantities will be a challenge.

The commodity's suppliers are made up of 10 large corporations spread out across the globe. Company X and Y constantly scour the 10 suppliers for best prices - and lock in futures contracts to hedge their risk. What I think Wall Street and other companies have failed to look at is: who supplies the suppliers? Through extensive research, I managed to identify the commodity producers as three European conglomerates operating in "warlord" stricken areas of a remote geographic location. 2 of the 3 conglomerates recently merged. The supply of the commodity is artificially controlled by the major conglomerates - whom essentially dictate the prices.

My research indicates that company X is seeking to strategically buyout the two major commodity producers. Flighttracker.com indicates that company Xs' private jet has been constantly flying back and fourth between the US and the remote country - information obtained online also notes that the key personal traveling on company Xs' private jet includes the CEO and respective board members (disclosed online by the pilots through public records on the internet). On contrary - the remote country is poverty stricken, contains limited resources (other than the commodity that is valuable to the food manufacturing business), extremely corrupt, and is ranked as one of the worst countries to do business with - there is no other better reason to indicate company X's presence down there other than to capitalize by buying out the commodity's producers.

To capitalize on my thesis I would long company X and short company Y's stock and bonds - since company X can strategically reduce their cost of sales on the cash cow product and they have the ability to lower company Y's profit margin by inflating commodity prices. Alternatively, one can buy options (which are trading relatively cheap) or futures to mitigate our downside risk. Since a deal of this nature would take months to complete - I would recommend putting on trades within the next 6 - 12months.