Revisiting Old Friends in the Bargain Bin

It's interesting sometimes to see the cycle that a stock and its underlying share price can take. Market optimism can take a stock to new heights and then boredom sets in and the stock price comes back down to earth. All this can happen without any real major deterioration in the underlying business.

This type of price movements typically happens during the transition from bull to bear market, or vice versa, as we saw in 2008 and 2009. At the market peak in 2007, American Express (AXP) shares trade for as high as $61 a share. By 2009, shares had fallen below $14, and five years later the shares are trading for $84.

During this entire cycle, it wasn't surprising to find many investment funds selling Amex in 2007 and 2008, only to buy shares again in 2009. This type of trading is not market timing, but rather it is selling stock at a fairly valued or overvalued price and buying stock at an undervalued one. It just so happened that this investing method was happening with the same underlying symbol.

 A more recent example was Facebook (FB). Many cashed out quickly after the IPO when shares topped $40, but bought in again when shares fell below $20. It was the same business, but the price changed the value play.

Today, I'm finding some old friends going through this same experience. One in particular is industrial company Tecumseh Products (TECUA) (TECUB). I recommended the shares a couple years ago when they were trading in the $5-$6 and subsequently exited once shares rose above $10. Shares climbed to as high as $12 and today have fallen back to around $6.

Some interesting catalysts are happening at Tecumseh which are leading me to look very closely at opening up another position. A chief risk officer was brought in to help fix the business and in this case all roads seem to be pointing to an asset sale. A private investor, who owns 4% of the Class B shares, intends to vote in favor of combining the Class A and B stock into one class of shares at an upcoming meeting on April 30.

As of today, the B shares trade at a 4% discount to the A shares, due to limited liquidity in the B shares. It's likely this vote will pass given that having one share structure makes it easier to engage in a sale of the company. Furthermore, this shareholder has told the company he will support any sale of the company at $9 or higher, a 50% premium to today's price.  

Tecumseh is clearly a business with a degree of uncertainty which the market may be discounting heavily. A new CRO, a shareholder friendly proposal and a focus on monetizing assets are all in the works. And the stock price has come back down to earth. It might be time to revisit an old friend. Such special situation investment opportunities are great because the upside typically has nothing to do with the overall market behavior.

At the time of publication Gad had no positions in stocks mentioned.