Relative value trading

nioka · 10 June 2015

Every now and then you can find two stocks that should have consistent relative value yet they do not. In the past I have had success with trading this way and I consistently look for these to appear. There is one at the moment, or rather two, that fit the bill and are worth an investigation. These are EDE and TAS.

TAS is a major shareholder in EDE and at times the value of the EDE shares held by TAS exceeds the market cap of TAS. At times like this it is worth selling EDE and buying TAS. When the ratio changes it is possible to then sell the TAS and buy back into EDE with more EDE shares than originally held.

Remember it is market cap not share price that is the governing factor. It is also necessary to take brokerage and capital gains tax into account. Another factor to watch is the taxation angle where trading this way causes problems in how the tax department views these trades and an individuals income tax position.

Start by comparing the SP graphs. They show an amazing opportunity. Research the companies activities as well.

nioka · 15 July 2015

In the past month the trading opportunities between EDE and TAS have been consistent and profitable as I suggested they may be. Anyone following the progress there?

VSntchr · 16 July 2015

Not sure if anyone is going to have much luck finding borrow on a penny dreadful resource stock? I assume that's what creating the opportunity - the inability for traders to short. If you held parcels of both it would provide a good indication of when to sell and perhaps buy more of the other..but as for an arb trade, without borrow its pretty inefficient.

nioka · 16 July 2015

VSntchr said:
Not sure if anyone is going to have much luck finding borrow on a penny dreadful resource stock? I assume that's what creating the opportunity - the inability for traders to short. If you held parcels of both it would provide a good indication of when to sell and perhaps buy more of the other..but as for an arb trade, without borrow its pretty inefficient.

Not one to borrow on. One to invest if you have faith in carbon nanotubes. A good way to build from a small investment is to trade between the two as their relative values vary. To show my point I will invest $1000 in one and without any more capital I will see where that will end up. I will post the trades as they occur. They will not be daily, nor will they be spectacular, hopefully they will prove worthwhile. Remember slowly, slowly catchee monkey.

sinner · 16 July 2015

nioka said:
Not one to borrow on. One to invest if you have faith in carbon nanotubes. A good way to build from a small investment is to trade between the two as their relative values vary. To show my point I will invest $1000 in one and without any more capital I will see where that will end up. I will post the trades as they occur. They will not be daily, nor will they be spectacular, hopefully they will prove worthwhile. Remember slowly, slowly catchee monkey.

I think VS is merely pointing out that the reason the opportunity exists is because there is no borrow to short available to traders to arbitrage this opportunity away.

That's no reason for you to not take advantage though! In fact you are theoretically adding economic value in the same way a shorter would.

I have seen you do this once before with impressive results, so people who want to learn about this should pay attention!

ThingyMajiggy · 16 July 2015

Interested, yet have no idea what you're talking about, where can I read up on relative value, or can you explain what you mean and how you go about it? How do you know how much EDE TAS has at any moment?

Please do show the $1000 investing, keen to learn more about this type of thing!

VSntchr · 16 July 2015

nioka said:
Not one to borrow on. One to invest if you have faith in carbon nanotubes. A good way to build from a small investment is to trade between the two as their relative values vary. To show my point I will invest $1000 in one and without any more capital I will see where that will end up. I will post the trades as they occur. They will not be daily, nor will they be spectacular, hopefully they will prove worthwhile. Remember slowly, slowly catchee monkey.

Yep. I was semi-with you on that one. I was just coming from a more market-neutral arb point of view. If you have a reason to be in the stock(s), then this idea appeals to me also.
I'll be watching

nioka · 16 July 2015

ThingyMajiggy said:
Interested, yet have no idea what you're talking about, where can I read up on relative value, or can you explain what you mean and how you go about it? How do you know how much EDE TAS has at any moment?

Please do show the $1000 investing, keen to learn more about this type of thing!

Start by comparing the two on a graph. You will see that their value changes from time to time but not in unison. Examine the fundamentals of each and decide a comparative value for each. Buy one, any one and sell it when it is way ahead and the other behind. then invest in the other one. Take brokerage into account. Each time you return to the original share you should have increased the number. Remember profits are taxable. Get to know the fundamentals of the stocks first. Good luck actually luck shouldn't be in the equation.

ThingyMajiggy · 16 July 2015

nioka said:
Examine the fundamentals of each and decide a comparative value for each. Buy one, any one and sell it when it is way ahead and the other behind. then invest in the other one. Take brokerage into account. Each time you return to the original share you should have increased the number. Remember profits are taxable. Get to know the fundamentals of the stocks first.

I know nothing about fundamentals so I'm way out of my depth here, so unsure about deciding on a comparative value for each, but keen to learn, been meaning to learn more about fundamentals etc.

Maybe I'll just shut up and watch/read how you go with the $1000, might make more sense to me then

nioka · 16 July 2015

ThingyMajiggy said:
I know nothing about fundamentals so I'm way out of my depth here, so unsure about deciding on a comparative value for each, but keen to learn, been meaning to learn more about fundamentals etc.

Maybe I'll just shut up and watch/read how you go with the $1000, might make more sense to me then

Leave out the word "fundamentals" substitute "companies". Get to know the companies, the inter-relationships, the financials, previous and present activities and examine how the directors relate to shareholders interests.

skc · 16 July 2015

There's a classic example in the market at the moment. CSE and SYR.

CSE holds ~11m shares in SYR. SYR shares are worth around $4, so CSE's holding is worth some $44m.

But CSE's market cap is only ~$25m. An opportunity perhaps?

Upon further research, however, you will find that CSE paid $300k for its SYR holding. So if the value inside CSE is ever "released", a CGT event is realised and the after tax value of the holding becomes more like $33m (plus any franking).

Also, CSE's balance sheet contains some $10m in provisions under non-current liabilities. Without knowing details about what this entails, the current market cap appears justified.

nioka · 17 July 2015

skc said:
There's a classic example in the market at the moment. CSE and SYR.

CSE holds ~11m shares in SYR. SYR shares are worth around $4, so CSE's holding is worth some $44m.

But CSE's market cap is only ~$25m. An opportunity perhaps?

Upon further research, however, you will find that CSE paid $300k for its SYR holding. So if the value inside CSE is ever "released", a CGT event is realised and the after tax value of the holding becomes more like $33m (plus any franking).

Also, CSE's balance sheet contains some $10m in provisions under non-current liabilities. Without knowing details about what this entails, the current market cap appears justified.

At first glance there seems to be an imbalance there. As a trading proposition they do not look to be a good one because a comparison of the SP graphs show that one follows the other on a regular basis so the relative value is consistent.

There may be a good reason holders of SYR to change to CSE on a value basis but when the shares have consistent relative value there may be some factor that makes that a risk. I'll keep looking for this.

nioka · 21 July 2015

My attempts to get started with a buy of 50,000 TAS at 2.4c was only partly filled with11,772. I have then changed to purchasing 15,000 EDE @ 43c to invest the balance. Total cost $1013. At this time I am up $85. I will watch to sell the EDE and buy TAS if the differential allows benefit.

nioka · 23 July 2015

Todays position:

Sell order in for 15,000 EDE @ 5.5c
" " " " 11,772 TAS @ 4.0c
Buy order still there for the balance TAS order 38,228 @ 2.4c

Holding 15,000 EDE + 11.772 TAS value $1140 Net profit $127

nioka · 24 July 2015

Todays action.

Sold 11,772 TAS @ 40c
Bought 11,000 EDE @ 49c

Position. Holding 26,000 EDE current value $1326.

Sell order in for 26,000 EDE at 5.5c.

Buy order still there for TAS as before. 38228 at 24c. Will probably not get filled at this price.

nioka · 24 July 2015

TAS has raced ahead of EDE today. According to my ratios it is a good time to switch from TAS to EDE.

nioka · 27 July 2015

Both EDE and TAS have had a rocket behind them today. In trying to trade EDE for TAS I have sold the EDE, at a substantial profit, but could not buy back in with EDE or TAS and retain all the profit. I have buys in for both and will watch what happens in the next day or two. I will buy back and may loose some ground in doing so. On todays pricing it is still a proposition, in my eyes, to sell TAS and buy EDE.

Anyone holding either has done very well over the last week.

nioka · 10 August 2015

There has been little opportunity to trade between the two because of the increasing price of both making it risky to sell one and not get value with the other when buying back in. However because the prices have increased for both then either one has been worth holding.

However I did sell the EDE today (but missed out on a buy of TAS) and have a cash balance on this arrangement of $2294. This amount will be reinvested in either TAS or EDE in coming days depending on the SP of either. Current profit is 100% on the original investment in 25 days.

nioka · 12 August 2015

Bought today: TAS.33,250. This uses all the cash balance from previous sale.

nioka · 24 August 2015

The market volatility over the past week and particularly today when at one stage EDE was down 10% and TAS was down 20% has enabled trading between the two to the extent that the holding of TAS is now 48,200. Not much change in value but holding more shares.

Some risk as todays falls may not just be the jittery market but could reflect some bad news regarding the concrete trials in the USA. News is due and if the news is good then the SP should get a real boost in a day or two regardless of the general market direction.

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