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Top 3 "Special Situations" Worth Considering

As a continuation to our free article "Six Special Situation Investments Worth Considering" this members-only article includes the Top 3. Two have to deal with the potential "acquiree" in M&A deals and the other is simply a high-yield distressed debt opportunity that is far less "distressed" than it used to be. Without further ado, here are the top 3...

3. Rite Aid (RAD)

Rite Aid has been in the middle of discussions to sell itself to Walgreen's Boots Alliance (WBA) for about a year and a half now. The roadblock has been the FTC’s ongoing requests for more information (they want to make sure Walgreen's doesn’t become too powerful in the industry). As a result, Rite Aid recently agreed to sell some its retail locations to Fred’s (FRED) instead of Walgreen's, but that still wasn’t enough to satisfy the FTC. As a result, at the end of January, Rite Aid and Walgreen's renegotiated the terms of the deal to acquire Rite Aid at a lower price, and Rite Aid's share price subsequently fell dramatically (from near the old proposed acquisition price of $9 per share to below the lower end of the new acquisition price range of $6.50 to $7.00 per share).

We currently have no position in any of the names involved in this deal, but if you are an aggressive investor, you could consider selling uncovered puts...

If you sell uncovered puts on Rite Aid, and the deal subsequently falls through (the terms say the deal must close by July 31, 2017), you’ll likely have the shares put to you at a much lower price. Owning the shares of Rite Aid at a lower price may be an attractive investment because the business (revenue) has been growing sharply in recent years, and Rite Aid will likely eventually find a way to profit more greatly from this trend. Specifically, Rite Aid’s profitability could increase dramatically if they find a way to restructure their very expensive debt load (most of it comes due in 2021). It seems likely that Rite Aid will eventually sell itself to someone (whether that be Walgreens, Fred’s or CVS) because there are great economies of scale to be achieved by these more efficiently managed businesses. And when Rite Aid does eventually sell itself, it’ll likely be at an attractive premium. And if the shares never get put to you, then you just get to keep the attractive premium for selling the puts on this recently volatile stock.

2. Navios Maritime Holdings (NM)

The business of Navios Maritime Holdings (NM) has been improving. It’s the result of shrewd capital allocation decisions by management and improving overall market conditions. We are not particularly excited about the company’s equity (although it has been improving), however we do believe the steeply discounted price on the big coupon debt is attractive. Specifically, we like the 19% yield on the senior unsecured callable 15-Feb-19 bonds.

Management has made a variety of tough recent capital allocation decisions to preserve the viability of the company and we believe the bonds are now money good. For example, in order to preserve cash, management bought back deepy discounted high dividend paying preferred stock, they bought back deeply discounted bonds (to reduce their interest payments), they were able to renegoatiate reduced bank debt cash requirements, they eliminated the equity dividend (less recently, back in 2015), they reduced their break even charter fleet, they’re leveraging economies of scale with their Navios affiliates, and their big debt maturities don't begin until 2022 (we like the 2019 bonds, as shown in the following chart).

We do NOT currently own any positions in Navios, but if you are an aggressive, income-focused fixed income investor, the Feb 15, 2019 bonds are worth considering, and you can read more about the company in their most recent investor presentation here (Q4 call is on Feb 22 at 8:30am ET).

Importantly, we like Navios, but these are still very high risk bonds that should only be considered as one position within a well-diversified investment portfolio (i.e. the yield is nice, but don't put all your eggs in one basket). We do NOT currently have any positions in Navios.

1. Westar Energy (WR)

Westar Energy (WR) is currently the acquisition target of Great Plains Energy (GXP). Specifically, Great Plains wants to acquire Westar at $60 ($7.50 above its current share price). We suspect the deal is likely to go through, but even if it does NOT, we still suspect the shares will not fall much, and they’ll very likely continue to rise much higher over the long-term. We’ve owned shares of Westar since the inception of the Blue Harbinger Disciplined Growth strategy, and we expect to continue owing them for the time being, regardless of the deal.

The terms of the deal are here. And according to the Topeka-Capital Journal, GXP has to pay Westar $380 million if the deal does not go through (not to mention the $100 million in sunk cost GXP has already spent pursuing the transaction). The final decision is now up to three Kansas Corporation Commission leaders, but the economics of the deal are fairly straight forward. For example, GXP shares will likely decline in the short-term if the deal goes through (as is common for the acquiring company), but the company will be in much bigger long-term trouble if it does not. On the other hand, Westar will survive (and even thrive) if the deal does not go through, but the shares will pop if the deal does go through. The final decision is expected by April 24th.

Important Note:

All of the Top 3 Special Situations involve risk. If you are going to invest in any of them, we recommend doing so as part of a diversified investment portfolio. For example, of the top 3, we currently only have a position in Westar Energy (we own shares of Westar Energy). You can view all of the holdings within our diversified investment portfolios here

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