Events Trader #51: Time to clearout these 3 stocks

27th April 2010

Time to clearout these 3 stocks

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The volcanic ash is clearing. And thousands of bleary-eyed travellers are on their way home.

It's been a week of high drama. But having broken above our stop loss target of €3.90 on Wednesday, our Ryanair trade has closed out without any return on our money.

But this is not the end of the story. In fact, it may not be long before we are back in on this trade again. Today, I'll explain why.

I also want to update you on Hewlett Packard's deal with 3com where we pocketed a nice 13% annualised return. And it's also time to move on from our Arriva trade.

First though, let's turn to Ryanair and the continuing danger of this Icelandic volcano.

We could soon get back in on Ryanair

On Wednesday Ryanair broke through our €3.90 stop loss automatically closing out our trade without making any money. I am quite disappointed as you can imagine. For now, the airports have returned to some semblance of normality - and the airlines are crying blue murder about the safety rules imposed by the regulators.

But we haven't heard the last of Eyjafjallajoekull. For a start the volcano will probably carry on erupting for a few months more. And that means that the threat of ash clouds is still there. Secondly the neighboring volcano has always erupted, and this one is much larger and could erupt more violently creating more ash.

Then there are the safety issues. There was a very good reason why the regulators brought in a blanket ban on flying. If volcanic ash had stuck to the turbofan engine of any outbound plane, it would have prevented the right mixture of air and fuel to combust - leading to a serious risk of engine failure.

What would happen if in the next week we see an engine failure in an aircraft that leads to an emergency landing? I don't think this is a possibility that we can fully discount.

Then there is the compensation issue that Ryanair will face from all the stranded passengers. How much will the airline have to pay for food and hotel bills to people who booked a €20 flight?

And finally if there is a chance of being stranded abroad for days then people will not book a £50 round trip for another weekend away. Last year Ryanair flew 60 million passengers. I doubt that many people will be so keen to take advantage of the low price offers that Ryanair are now offering.

Anyway the market has gone against me. But I can't help feeling that in this case the market is wrong and the rise is due to short covering and that the cheap flow of liquidity is still there looking to push the market higher for no reason.

So lets keep this trade on the watchlist. Because I still think we will have more surprises in the months ahead.

A 13% return on 3Com

While the volcano was grabbing our attention for the last few weeks, Hewlett Packard managed to wrap up their deal with 3com.

As you know, we were long 3com (COMS US) at $7.64 since the 12th of January 2010 (Events #35) when Hewlett Packard launched an offer at $7.90.

The offer is now closed and Hewlett acquired the totality of the outstanding shares in 3com. If you purchased the shares you should have now received a payment of $7.90 for each share you owned, and the money should be in your account, the acquisition was completed on the 12th of April.

We managed to make 3.4% in absolute terms. And because we kept this position open for 3 months, our annualized return on this strategy has been just over 13%. This trades might seem boring, but that is a pretty decent return on this strategy. I'll keep you updated on more of these trades in forthcoming issues of Events Trader.

Never let Greed get the better of you

Last week Deutsche Bahn approved a £1.59 billion takeover for the UK transport company that will value the share at 775 pence per share plus an 18.8 pence dividend.

At this point is not really worth bothering with the transaction. The price is 765p or only 1.4% below where the offer is. I suppose we could have been a bit more aggressive on this trade. But on the flipside, had the offer failed we would be sitting on much higher losses than the money we did not make as the share would have plummeted back to 500-600 pence (remember what happen with National Express when the bid was pulled).

Well that's the name of the game. And all you can do is to draw some lessons from these trades. There are two conclusions here. One, Greed is good. But two, never let greed take over - always take more care of the potential losses than the possible profits.

One further point needs to be clarified - the dividend. At the moment the shares are trading ex dividend, as of 7th of April. So if you bought them now you would not be entitled to receive the dividend, which is paid a month after the record date on the 10th of May.

That's it from me this week. If you want to get in touch with me please e-mail me at eventstrader@f-s-p.co.uk

Riccardo Marzi

Events Trader

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