15th September 2009
Time to short National Express
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The National Express board has decided to enter talks with the Cosmen / CVC consortium planning to make a bid for the group. The board is discussing some aspects of the bid, but be aware that so far the offer they have made is only theoretical. There is no guarantee that the approach being made by the consortium will lead to an offer for the company. In my view, this means the stock is worth shorting if it gets up to 480p. It's currently at around 476p, so we're not far off that now.
Your theoretical downside on this trade would only be 15p to 20p (or 3-4%) as the bid is for 500p. But as you know, there is still lots of uncertainty surrounding the company - for example, the issues regarding the other rail franchises and the need for a new injection of capital have still not been sorted out - and if this proposal does not lead to a bid, then expect the stock to crash all the way back down to 250p to 300p.
I describe the loss as theoretical, because once the bid is finalized and accepted, the stock should still trade below its bid value as we have seen in other situations, and you could cover your short for less. I also think this short is worth considering as the chances of an improved bid are minimal, so this protects your downside. Even with a 70-80% chance of the bid succeeding, this still leaves a 20-30% chance of failure, which might result in a gain for the short seller.
To explain it in easier terms, you have a 70-80% chance of losing 4%, but a 20-30% chance of making 40-50%. To me, this is worth going for.
As shorting stocks is quite a complex business for the retail investor, I think it would be better to play this via spread betting in this instance. I would sell the stock short once the share price gets above 480p. Do bear in mind that with spreadbetting your losses are theoretically unlimited, so do watch the stock and ensure you keep the size of your bets to levels you feel comfortable with.
Next week I will be away, so Events Trader will not come out. I will be back the following week. You can still contact me at eventstrader@f-s-p.co.uk, but I will take longer to reply to your question.
Riccardo Marzi
Events Trader
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