Purchase: Comdisco Contingent Distribution Rights (PK: CDCOR)

I have been trying to acquire this for a while now and finally completed my transaction. As I mentioned before, I will not disclose anything I purchase/sell until it is complete. My portfolio is small so this doesn't really impact many cases except for a few penny stocks.

As readers may be aware, I purchased the liquidation play Comdisco (PK: CDCO) a few months ago. Anyone intersted should read that post and read the filings at the SEC. I decided to add to my position through the Comdisco Contingent Distribution Rights (PK: CDCOR). The Rights pay out a percentage of the liquidation value (I detail my calculation below--point out any mistakes please :) ).

As usual, if anyone is interested in these illiquid securities, make sure to place a limit order specifying the price.

Purchase price: $0.094
Investment time horizon: less than 2 years

Let me go over my situation since it will help other newbies who may face the same situation. Do note that I'm in Canada where brokerage costs tend to be higher and access to certain foreign markets, such as OTC Pink Sheets, may not be straightforward. If you were living in the US, costs are lower (commissions may be around US$10) and OTC Pink Sheets will be considered as a local market.

Why Didn't I Buy the CDCORs Before?

I looked at CDCOR when I was evaluating CDCO and decided against it. The potential return on each was quite similar. The Rights had slightly higher return (about 10% more, but it can be much higher if you are able to buy them at a lower price) but it was very illiquid.

Liquidity is a problem for me because my discount broker in Canada, CIBC Investor's Edge, charges US$25 per trade (most other Canadian brokers have similar pricing.) That in itself isn't that costly. If someone invests $5000, that's only a cost of 1% ($25 for buy and $25 for sell). But there is more to it.

The first thing to note is that my broker charges more if it is more than 1,000 shares or something like that; and they charge more if it is a Right or a Warrant (I'm not sure if they count US-listed Rights as "shares" but I once owned Canadian-listed Nevsun Warrants and the commission on that was higher than on normal shares.) Since this is a penny stock--it literally is 10 cents--simply investing $1000 means you end up buying 10,000 shares. So the commission wouldn't really be the minimum $25 and would actually be more than $50 or even $100.

Furthermore, and most importantly, it is unlikely*, although possible on some days, to complete one trade (say 25000 shares or $2500) in one block. My broker seems to charge the commission each time a trade is partially filled. If all the partial fills are within one day, they only charge you once; but if the fill takes 3 days, they will charge you three times. There doesn't seem to be any way to only place a block trade through their web interface. It may be possible to place a block trade through their broker but that costs more and I didn't think it's worth it given my small portfolio.

So, these securities are just not worth it for me. That's why I decided against CDRs initially.

Why Did I Buy Them Now?

But then, after some thought, I decided to sign up for a fixed package that CIBC was offering. The package is prorated so that someone who signs up halfway through the year only pays half, but the total cost is $400 for the full year (when I signed up, it was around $300 or something like that since a quarter of the year had passed.) The package offers up to 50 trades without any cost. So, basically, if you use up the maximum 50, each trade costs $8. Concentrated investors like me will never go anywhere near 50 transactions in an year. Even if my portfolio were bigger, I will probably still make 5 to 10 trades per year. So these package deals are useless in normal circumstances and that's why I never signed up for it before*. However, if one wanted to buy penny stocks then it is worth it to me. I was interested in an additional penny stock (I'll mention this in another post) so the deal seemed worth it, albeit a bit expensive for a small investor like me.

Basically, if someone invests $10,000, they will be spending a max of 4% on commissions ($400) with this package. The pennystocks I'm investing in are special situations with a potential 20%+ return so I'm willing to absorb a 4% commission. In normal circumstances, I always aim for less than 2% commission (e.g. if I pay $50 ($25 buy and $25 sell), I should really invest $2500 minimum--in reality the commission tends to be much lower because you end up holding something for many years.)

If you are able to purchase the CDRs at reasonable commissions, they seem slightly more attractive. You may be able to earn 10% more on the CDRs than the shares (details depend on price.) CDRs also seem to have a higher claim so if something goes wrong, you are less likely to lose money on the CDRs than the shares.

Furthermore, there is a possibility of the CDRs being paid off earlier than the shares. I'm not entirely sure about this but if some of the assets take too long to dispose, liquidators may pay out the CDRs (assuming there are no further obligations to the CDR holders.) I'm just guessing here but if the CDRs are cashed out in, say, September, while the shares are cashed out next year, the Rights seem more attractive.

Potential Return on CDRs

If one wanted to be thorough, they should go through the CDR legal document and figure out how much Comdisco is supposed to pay out to the Rights holders. Being a lazy guy :( I simply used the CDR liability determined by management on the balance sheet.

CDCOR price = $0.094
Oustanding Rights = 148,448,188
CDR liability on the books = $22,079,000

Market Cap = $0.094 * 148,448,188 = $13,954,129.67

Potential Return = $22,079,000/$13,954,129.67 - 1 = 58.2%

I feel that this is an attractive return given the risk. If this liquidation completes in 2 years, I'm looking at around 29% (excluding commissions and taxes). I would love to make a concentrated bet on this (or another liquidation I'll mention in another post) but I don't have enough free cash in this taxable account :(

If you are in America or have a better broker, I think you can earn slightly more. If you are thinking of buying, you might want to place a limit order around $0.09. I had an order at $0.086, which is really cheap and is a multi-month low, and it came nowhere near filling. I tried $0.09 but had difficulties filling because my order never seemed to have much of a precedence**.

Side Note

Buying illiquid stocks is as close to pure capitalism as anything for small investors. Small investors can actually see their trades showing up on the weekly chart :) Investors will also have to directly compete with others and pick their bid/ask prices carefully. At times, I saw others place an order at a slightly higher price than my bid; and I also changed my bids to levels slightly higher than the prevailing bid.

(* I actually signed up once before in a similar situation where I had to sell Warrants but cancelled it at the end of the year.)

(** This is a good point to consider for newbies, which is what I am. For some reason, perhaps because my broker sucks, or treats small investors as little ants ;), or because I'm in Canada, I felt that my orders never got priority. Even when I was the highest bidder--I know this because I raise my bid slightly and see it being reflected at pinksheets.com--I never got any fills. When someone did sell at my bid price, it often went to someone else (who obviously raised theirs to match mine.) I can't be certain of this but the only time I seemed to get fills was when sizeable blocks were being unloaded. There were some exceptions but this is largely how things unfolded. Maybe this is how markets work, with priority given to certain investors (perhaps those using an actual human broker.) I'm sure a vetern would find all this very newbiesque of me but it's my first time operating in these illquid markets :) )


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