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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (6025)	2/11/1999 8:22:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 78531

Don, Here's a little more on my thinking about Sbarros. I bought a substantial position in Sbarro's prior to the deal being accepted because I thought it was cheap at the time. The deal itself has been accepted by shareholders and the financing has already been arranged. So I would say that the only way it will not go through is if there is a market crash and the financing falls through. This is obviously a very low probability event. Hence the very high likelihood that I will make a 19.3% annualized return on this investment. Under normal conditions I would suggest to anyone that they just buy the stock. The annualized rate of return on the position (a 3 point gain in 3-4 months on a $26 stock) is very attractive annualized. This gets me to my view on the market and why I bought the puts for this second purchase. It's my view that the Blue Chip indices are discounting low interest rates and historically high returns on equity as if they a permanent. My guess is that those conditions will be impossible to sustain. On a "normalized basis" I can make a very good case that the S&P500 would need to drop by 50%-60% to reach fair value. I further believe that the global financial system is in much worse shape than either the public, the Fed, the Treasury, the press etc... understand or are willing to admit. As a result of this view and the fact that I typically only invest in high quality companies I am carrying a very high cash position for me right now. I can't find any companies that meet my strict criteria for value. I view my new investment in Sbarro's (with the put) as a cash alternative. The combined position without the put is more than I would like to have in Sbarro's equity at this time. In the event of a crash (very unlikely within 3-4 months), the second batch that I just bought will have a very limited loss, if any, as constructed and will still earn a very respectable return. Wayne

To: Freedom Fighter who wrote (6025)	2/12/1999 8:57:00 AM
From: Mike 2.0	Read Replies (2) \| Respond to of 78531

Re: Arbitrage opportunities.... You are quite right, for comparative purposes the return on such an arbitrage deal must be annualized. I haven't looked at Sbarro deal personally but on the face of it, looks like you landed a nice merger arbitrage transaction. Also such opportunities are an excellent market diversification tool. The only thing that is going to make Sbarro's price move will be a change in the terms of the deal or (hopefully not) the deal is cancelled. So Sbarro has a market beta of zero. This reminds me of a mutual fund which does this arbitrage stuff exclusively: Merger Fund. Last I heard it was closed to new investors but after reading your post I will revisit it. Thanks Wayne! BTW here is another arbitrage opportunity worth discussing here: has anyone looked into buying closed end funds which are trading at a discount to NAV, where the CEF is facing pressure from shareholders to go open end? Of course the fund then trades at 100% of NAV and investors pocket the old closed-end discount.