Wednesday, September 27, 2017 19 comments ++[ CLICK TO COMMENT ]++

Sold: Cabela's (CAB) Merger Successfully Closed

I haven't had much time to blog and the highly-valued markets are frustrating for any contrarian or anyone waiting for low valuations. I have continued to research some companies and hope to write something up soon but the valuations are not compelling. If anyone has some stock ideas I should investigate, leave a message below or email me (If I am interested in them, I'll research it and write it up).

In any case, the Cabela's (CAB) merger went through. This was a low return, short time-frame, situation and it worked out as expected although it went through a turbulent period. The stock sold off quite a bit after I bought it, possibly due to risk of the financial division sale not going through. That would have been the best time to enter this risk arbitrage position. It kind of seemed like this deal might not close and I would take a loss but fortunately it didn't turn out that way. As is usually the case with risk arbitrage, in hindsight the market always looks like it was wrong (at least for deals that close).

As I mentioned when I first took the position, I made some currency computation errors and ended up with a much larger position than I would have liked. I'm glad the deal closed given that there was a real risk of taking some big losses due to the position sizing mistake.

I'm kind of backing off risk arbitrage positions now (if I like the company being bought out, I will probably still take a position). In some sense, it sort of reminds me of what happened in 2007 when there were a lot of deals being done in late stages of a bull market at high valuations. If you are into risk arbitrage, you should be extra cautious for several reasons:

  • Market valuations are high: One can't generally tell how overvalued a market is, or if it is even in a bubble, except in hindsight. But my opinion is that the market is highly valued and possibly in a big bubble. Risk arbitrage deals are kind of dangerous right now because the buyout deals are happening at high valuations (prices will fall a lot if deal fails), and purchasers will try to weasel their way out of deals (using any legal language permitted in the deals) during bad times (such as when the stock market falls and they realize they have bought something at really high valuation, or if they can't get financing).
  • Unpredictable American presidency: The Trump administration is hard to predict and deal decisions almost seem arbitrary. I would definitely be cautious with foreign buyouts (especially from China, India, Korea, etc).
  • Currency fluctuations: Might not apply to you but if you are Canadian, you have to be careful since the C$ has appreciated against the US$ recently and possibly may continue if FedRes doesn't raise rates but BOC does. It looked like I would lose money on this deal because the US$ fell quite a bit within the last few months, but it rallied in the last few weeks so I ended up only losing about 1% on fx.
  • Risk with numerous sectors: Several industries are facing problems and it's not clear if you are taking positions in areas with potential secular declines. For instance, the retail sector has deteriorated way more than I imagined and I suspect the Cabela stock would have fallen way more than I initially estimated if the deal had broken.

Overall, satisfied with how things turned out.

Price Sold: $61.50
Total Return: 3.8% (annualized (estimate): 25%--not meaningful)
Total Return (C$): 2.8% (annualized (estimate): 18%--not meaningful)

When I was starting out and had smaller portfolio, these small returns would not be worth it but with a moderate portfolio, it can be ok.

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19 Response to Sold: Cabela's (CAB) Merger Successfully Closed

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December 23, 2017 at 11:58 AM

Came across your post. CMG is an interesting stock. I have decided to be cautiously long. The reason being low financial leverage and high operational leverage plus long runway for growth. I think the company should be able to recover from the food safety issues though the costs will increase somewhat depressing margins.

December 23, 2017 at 1:12 PM

As you can see financial metrics have bottomed out and are recovering but the price has not. https://i.imgur.com/rN8IKmT.png

January 8, 2018 at 8:34 PM

Sorry for the late reply Senta. The key is whether the food safety issues have been sorted out and if so, have they destroyed their original business (fresh ingredients)? It's really not clear to me.

I believe there is also a possible management change coming up so I'm waiting to see what happens with that.

It is definitely one of the interesting former-growth-stock picks out there.

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