​WWII 105: The Odd Lot Special Situation Investment Strategy Explained

Have you subscribed to my podcast yet? If not, you can click the buttons below to subscribe:

​Main Topic: The Odd Lot Special Situation Investment Strategy Explained

  • This episode is about another type of special situation called “odd lots”. You may recall other types of special situations I recorded podcast episodes about including:
  • The “odd lot” strategy is a great one for people who have very little capital to start with, as you can only invest a limited amount of money in each odd lot situation. We are talking about a few hundred dollars to a few thousand dollars. For those with a million dollars in capital, this strategy would probably be a waste of time except in certain exceptions.
  • First, let’s define an “odd lot”. They typical definition of an odd lot is when you own 99 shares or less of a particular stock. You are considered a “mom and pop” type retail investor for the most part.
  • The “odd lot” strategy is triggered when a company is buying back shares of its own stock by way of a tender offer on form SC TO-I, an Securities and Exchange Commission required document to initiate a tender offer.
  • To refresh your memory, a tender offer is an offer by a company to buy shares in a company, typically for cash. A SC TO-I tender is when a company that is buying back its own shares. A SC TO-T or SC TO-C tender is when a company is offering to buy shares in ANOTHER company.
  • If you participate in a tender offer, you must instruct your broker to tender your shares into the tender offer in order to take advantage of whatever deal is being presented. This is not a passive strategy, you will actually have to contact your broker during the process.
  • The odd-lot provision in an SC TO-I tender is a way for a company to quickly and easily buy out a bunch of retail investors for cash. Not every TO-I tender offer has an odd lot provision, to it’s important to set up a search to look for just that type of provision.
  • One way to do that is to use the search function on the EDGAR database search site on SEC.gov. You can search for the text “odd lot” or “small lot” in every SC TO-I form going back four years. I do the search every week or two just to see if there is anything big enough for me to consider.
  • Many TO-I tenders have a pro-ration component for normal, not “odd lot” shareholders. This means that you can tender all your shares, but they may not take them all as part of the tender. For example, they may only be buying in a portion of the outstanding shares, not all of them.
  • Some TO-I offers are for a range, and even the odd-lot holders may be subject to this range. Be sure you understand the worst case. If you will still have a profit in the worst case, is it really enough to get involved?
  • The great news is that the company will already have the cash to pay out to shareholders with no financing required, no regulatory approval required like in merger arbitrage, and since they are public, the process is transparent.
  • The benefit of the “odd lot” strategy is that you will not get pro-rated, but you can only tender 99 shares or less. So the key to this strategy is that the value of the 99 shares has to be meaningful to you. Lets do some examples
  1. Assume you don’t own any shares to begin with. The TO-I is for $2 per share. You can buy shares for $1.90. You would spend $188.10 and receive $200 for a net gain of $11.90. If you paid a $7 commission to buy the shares, you would only be netting $4.90, not worth it. Your broker will probably charge you a fee of $35 or more do tender the shares, and you will have actually lost money.
  2. Assume you don’t own any shares to begin with. The TO-I is for $1,100 per share. You can buy shares for $1,000. You would spend $99,000 and receive $110,000 for a net gain of $9,900. In this case, the commission and fee you pay would be miniscule compared to the almost $10k profit.

Thus, the keys to success of investing in odd-lot special situations is:

  1. Do the math to be sure the profit is worth the effort after fees and commissions
    • The spread needs to be available
    • The profit should be many multiples of the commission and fees you will pay
  2. Read the SC TO-I thoroughly to ensure you understand all the nuances of the odd-lot provision.
    • Is it 99 or less, or some other amount
    • Who pays fees? Sometimes the company itself will pay the fee your broker would charge you
    • Does the company have the cash to do this?


​Conclusion:

  • The odd-lot special situation strategy can be very lucrative, but the math has to work to your advantage.
  • Use the SEC.gov website to find and take advantage of these situations by putting this search on your list weekly searches to conduct.

​Ask JB: Harvesting and Using Taxable Losses

Ask JB: Lost $5,000 this year but dont want to use it as deduction. Can I use it for next year? (self.investing)

submitted 14 hours ago by samanthabus

My parents will f**k me up if I let them know. Can I use the $5,000 loss for next year income tax?

JB Says: You can only use up to $3,000 in capital losses to offset taxable income each year. So you can use $3,000 this year, and $2,000 next year, or if you choose, $3,000 next year and $2,000 the following year (+ or - whatever happens in between.

Ask JBWhich Investing Stategy Is Best? (self.investing)

submitted 2 hours ago * by SillySausage87

Buy n hold

Try to time the peaks and dips (selling total position)

Try to time the peaks and dips (selling a portion of position)

I kinda feel that the 3rd one is best cos it locks in some gains, but doesn't withdraw entirely from the position (so if you didn't time the peak perfectly you can still ride it up further with some of your money)

From your experience, which works best?

​JB Says: Market timing never works. If it works for you once, you will be convinced that it will always work and you are a genius, but it won't, and you are not.

Many case studies have shown that the boring approach of buying quality companies run by good management with growing earnings and dividends drive the most wealth in the stock market of any type of investment strategy. It's boring, but it works.

​Activist Investor Action Alert: PrimeStone Capital Influences $TNC

https://www.barrons.com/articles/should-tennant-merge-with-denmarks-nilfisk-1513395365

Thoughts on this podcast? Disagree with me on some point? Something I missed? Leave a comment!

About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

Leave a Reply 0 comments

Leave a Reply: