People often assume that investors are looking for the returns either from secondary market or the primary market. For example value investors look for the businesses with low price-to-earning and price-to-book ratios. They are attracted to companies trading below book value, which gives high earnings yields (lower the price-to-earnings ratio the higher the earning yield). But there are other sets of investors who like to exploit all possible opportunities in the market. One of them is what we call “Special Situations”.
Before understanding the Special Situation Investing, one needs to be able to differentiate between investment operations and the speculative one. Because Special Situation investing is based on fundamental study, this is not speculation. Special Situation can offer some of the best value oriented opportunities in the market.
Let us understand what’s special about special situation investing. This type of investment is totally different from other styles of investments; in this the performance is not directly tied to any market environment. A Special Situation Investment is one whose performance and financial results are dependent on corporate action rather than demand and supply in the stock market.
Special Situations involve variety of corporate activities like spinoffs, liquidation and recapitalizations etc. We can find Special Situation opportunities in any mergers, demergers, FPO, right issue and in many other activities. We can take some examples like demerger of the NCE Research unit of Piramal Life Sciences Limited into Piramal Healthcare Limited.
In this demerger, investors will get one share of Piramal Healthcare Ltd. for four shares of the Piramal Life Sciences Ltd. The current price of Piramal Healthcare is Rs. 360 and the price of Piramal Life Sciences is Rs. 85. Total spend for four shares of Life Science is Rs. 340, after demerger one will get one share of Healthcare worth Rs. 360. Moreover, they will have some value of existing shares of Life Science. This can be an example of the special situation investing. The decision whether this is a case of special situation or not is totally based on the drilled down study of the fundamentals of the company. The risk of price correction is there, but one has take decision on their study about the company.
Market is full of opportunities, one need to exploit those opportunities. This is one style of investing where one can make profit even in stable market. The market environment or the price movements in the stock market do not have significant impact on this type of investing.
