Free Money

Raskolnikov

Ok, so a lot of you guys didn't like some of my investment picks. Surely I can't go wrong with a free money thread.

Got this filing in my mailbox this morning for a company called Footstar - http://www.google.com/finance?q=OTC%3AFTAR

http://www.sec.gov/Archives/edgar/data/1011308/000092189510001274/form10q07827_07032010.htm

Last price tick was 34 cents.

Management estimate that the liquidation return to shareholders will be between 41 and 47 cents. That's between a 20-40% payout. Time frame for payout would be less than a year as I reckon as most of the business has already been sold off and there's only cash and real estate on the balance sheet. Management have also consistently underplayed the level of payouts, so it's quite likely that the payout will be at the upper end of 47 cents.

EoghanConway

Wouldn't that depending on the CEO's success at disposing of real estate in New Jersey? Don't know anything about that so I'll pass.

ixus

Rask - Please disclose the risks in this investment. I can't have you telling people there's free money to be made!

Raskolnikov

Risks:

You're assuming the financial statements are correct - all previous filings suggest that this is not an issue.
There are unforeseen problems with the disposal of the land - unlikely, as it was only recently appraised.
They could get sued - there is nothing to suggest that this is any way likely.

woodseb

it's trading at 0.375 - 0.43 and fairly illiquid so looks like you'd have to cross the spread to trade

If you're likely to get a range of 0.41 - 0.47 and have to wait for a year for a real estate deal to complete, it looks fairly priced if a little expensive so no free money really.

also

The Company has been marketing its Mahwah Real Estate since May 5, 2007. As of July 3, 2010, the Company estimates that the fair value of the real estate, less estimated closing costs, is approximately $6.2 million. This estimate is based on unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be materially different. There was no change in this value from January 2, 2010 to July 3, 2010.

that wouldn't fill me with confidence that the real estate has been on the market for over 3 years

Raskolnikov

woodseb wrote: »

it's trading at 0.375 - 0.43 and fairly illiquid so looks like you'd have to cross the spread to trade

If you're likely to get a range of 0.41 - 0.47 and have to wait for a year for a real estate deal to complete, it looks fairly priced if a little expensive so no free money really.

Use a limit order of at most $0.35 and you'll eventually snag some shares.

woodseb wrote: »

that wouldn't fill me with confidence that the real estate has been on the market for over 3 years

I have contacted three real estate agents in the region, the average estimate for the value of the land is not only realistic, it exceeds the estimate set down by Footstar.

Raskolnikov

By the way, I have purposely not mentioned the key detail that almost guarantees that this distribution will take place, and will significantly exceed the current market price.

Can anyone find it?

woodseb

Raskolnikov wrote: »

Use a limit order of at most $0.35 and you'll eventually snag some shares.

I have contacted three real estate agents in the region, the average estimate for the value of the land is not only realistic, it exceeds the estimate set down by Footstar.

fair enough, if you're confident enough in your own research go for it

it still looks far from free money to me though, there looks enough risk there be fairly priced around $0.35

Smcgie

I got caught up in a "free money" incident about 2 years ago that cost me over 6000. The companies sp was totally collapsed based on debt, but they were waiting on payment of 6million off another company. This 6 million was equal to more in cash per share than the sp.

What happened? The company called in the receivers just before this payment was due and folded the company up therefore shareholders lost everything.

The is no such thing as free money and this thread should not encourage anyone to buy the stock(s) in question.

If op wants then that's his Decision but stay clear!

Raskolnikov

Smcgie wrote: »

I got caught up in a "free money" incident about 2 years ago that cost me over 6000. The companies sp was totally collapsed based on debt, but they were waiting on payment of 6million off another company. This 6 million was equal to more in cash per share than the sp.

What happened? The company called in the receivers just before this payment was due and folded the company up therefore shareholders lost everything.

The is no such thing as free money and this thread should not encourage anyone to buy the stock(s) in question.

If op wants then that's his Decision but stay clear!

Did you even look at the balance sheet? There are no accounts receivable or debt here. The assets are in cash and real estate.

Raskolnikov

Smcgie wrote: »

The is no such thing as free money and this thread should not encourage anyone to buy the stock(s) in question.

My mentor would get a chuckle out of that statement. You're totally incorrect. There is essentially free money to be made doing arbitrage, reverse split trading, liquidations, etc. He did them for 20 years, people like Warren Buffett used to do them, for people who work hard enough, these opportunities can be found and do exist.

woodseb

Raskolnikov wrote: »

My mentor would get a chuckle out of that statement. You're totally incorrect. There is essentially free money to be made doing arbitrage, reverse split trading, liquidations, etc. He did them for 20 years, people like Warren Buffett used to do them, for people who work hard enough, these opportunities can be found and do exist.

It still isn't free money, all it is is that you price the risk that the deal won't pay out differently to the party that wants to sell. You're right that there are lots of these risk arbitrage opportunities around like this but once in a while you will get burned. The trick is to minimise the risk of this happening.

In this case there are a number of risks; namely whether they can sell the real estate at the claimed price within a year (bearing in mind this is a liquidation sale and has already been on the market for 3 yrs), the illiquidity of the stock and other legal delays and costs that could prevent payout. Is enough stock available to buy without moving the price and to make it worth your while?

You can buy the stock at 0.375 (the current ask) and if the real estate is sold at the low end you might get 0.41 after a year - that looks like a decent enough return, even better if you can get it at 0.35. The assets of the firm also provide you with some floor to your trade.

when you analyse these deals you should really play the devils advocate with yourself, try to cover every possibilty why this mightn't work out - after that its a personal decision if the risk is worth it

Raskolnikov

woodseb wrote: »

It still isn't free money, all it is is that you price the risk that the deal won't pay out differently to the party that wants to sell. You're right that there are lots of these risk arbitrage opportunities around like this but once in a while you will get burned. The trick is to minimise the risk of this happening.

In this case there are a number of risks; namely whether they can sell the real estate at the claimed price within a year (bearing in mind this is a liquidation sale and has already been on the market for 3 yrs), the illiquidity of the stock and other legal delays and costs that could prevent payout. Is enough stock available to buy without moving the price and to make it worth your while?

You are correct when you state that this is an exercise in risk management. You are also correct in stating that not all arbitrage situations contain the same risk. Finally, you are correct in assuming that you will eventually get burned when a situation goes wrong (I've done 11 arbitrage situtations now, so far all so good). Even if a liquidation does go wrong, of the few times it does, the vast majority of those times, you will still get a distribution, it will just be less than what you paid for.

As for why I am so confident of this investment? Look at the filing, the top of page 13 to be precise.

On March 15, 2010, Mr. Couchman was awarded a stock option to purchase up to 2,500,000 shares of the Company’s common stock at an exercise price of $0.40 per share (after giving effect to the liquidating cash dividend of $0.10 paid on March 12, 2010). On the date of the grant, the closing stock price of the Company’s stock was $0.23. The stock option was fully vested at the time of the grant. The stock option expires upon the earlier of the tenth anniversary of the grant date and the payment of the final liquidation distribution to the Company’s shareholders. The Company believes that granting a stock option with an exercise price substantially above both the estimated liquidation value per share and market price per share at the time of the grant will further incentive Mr. Couchman to work to maximize distributions to shareholders.

Now, if the Chairman is happy to willingly purchase stock at $0.40, he is incentivised to maximise the final distribution to shareholders. Not only that, but it's highly unlikely that he bought stock at $0.40 with the expectation of a $0.41 return.

woodseb

Raskolnikov wrote: »

As for why I am so confident of this investment? Look at the filing, the top of page 13 to be precise.

Now, if the Chairman is happy to willingly purchase stock at $0.40, he is incentivised to maximise the final distribution to shareholders. Not only that, but it's highly unlikely that he bought stock at $0.40 with the expectation of a $0.41 return.

Is there any evidence he has bought the stock at .40? as this shows that he is entitled to excercise a currently out of the money option - it doesn't mean he is currently willing to purchase the stock or has already bought the stock

He has a free option to take some stock at .40 prior to a possble 41 distribution -> now that is free money:D

Raskolnikov

woodseb wrote: »

Is there any evidence he has bought the stock at .40? as this shows that he is entitled to excercise a currently out of the money option - it doesn't mean he is currently willing to purchase the stock or has already bought the stock

He has a free option to take some stock at .40 prior to a possble 41 distribution -> now that is free money:D

Couchman owns 49% of the stock. He's taken stock in lieu of a salary. He is very motivated to maximise the distribution to shareholders.

pjproby

doing very well today,good tip-bargain alert in its own way.

drimadrian

Raskolnikov wrote: »

Couchman owns 49% of the stock. He's taken stock in lieu of a salary. He is very motivated to maximise the distribution to shareholders.

Salary? For doing what exactly?

This is from the 10K:

On March 15, 2010, the Company issued shares of common stock having an aggregate grant date fair value of $500,000, or 2,173,913 shares, to Jonathan M. Couchman, the Company’s President, Chief Executive Officer and Chief Financial Officer, in lieu of cash compensation for base salary for Mr. Couchman’s services as President, Chief Executive Officer and Chief Financial Officer for the twelve months commencing March 1, 2010.

So if the distribution happens at say 40c (for arguments sake) he gets paid a salary of $850,000? This company has no operations. It's basically a shell. Is he also the real estate agent? Crazy.

By the way, I have purposely not mentioned the key detail that almost guarantees that this distribution will take place, and will significantly exceed the current market price. Can anyone find it?

No. Please post it as the suspense is killing me.

Raskolnikov

I'm honoured you should feel it necessary to register to refute me.

drimadrian wrote: »

So if the distribution happens at say 40c (for arguments sake) he gets paid a salary of $850,000? This company has no operations. It's basically a shell. Is he also the real estate agent? Crazy.

His salary has already been priced in, the company will almost certainly not be around this time next year.

drimadrian wrote: »

Please post it as the suspense is killing me.

I pretty much already have. The CEO owns nearly 50% of the stock. It's in his interests to liquidate. Everything he has done so far has indicated the he will continue on the present path, his fiduciary duty.

EoghanConway

No refutation here, the share price has indeed soared past the range you stated so congrats on the pick.

But can you make it two for two? As it has already exceeded the suggested final sale price would you recommend exiting now or holding a bit longer?

drimadrian

Raskolnikov wrote: »

I pretty much already have. The CEO owns nearly 50% of the stock. It's in his interests to liquidate. Everything he has done so far has indicated the he will continue on the present path, his fiduciary duty.

The original Plan of Liquidation was dated May 2008. Clearly the CEO has done he best to delay the final distribution to shareholders. The company has had no operations since the end of 2008 yet he continues to pay himself a huge salary. He is milking this cow dry. Fiduciary duty my ass.

drimadrian

EoghanConway wrote: »

No refutation here, the share price has indeed soared past the range you stated so congrats on the pick.

Soared? The OP picked it at 34c. Since he posted it shares have only traded between 38c and 40c. The 52c closing price last Thursday was due to a buy of only 200 shares. It currently has a bid/ask of 39c/42c. GLTU

EoghanConway

drimadrian wrote: »

Soared? The OP picked it at 34c. Since he posted it shares have only traded between 38c and 40c. The 52c closing price last Thursday was due to a buy of only 200 shares. It currently has a bid/ask of 39c/42c. GLTU

At it's most conservative, that is still over 10% in less than 10 days. It was a good pick (although truthfully I'm dubious about it's future).

woodseb

EoghanConway wrote: »

At it's most conservative, that is still over 10% in less than 10 days. It was a good pick (although truthfully I'm dubious about it's future).

that's pretty much irrelevant if you can't buy the stock at any reasonable price because it so illiquid - the OP was unable to buy at the price at which he considered it to be cheap

Raskolnikov

drimadrian wrote: »

The original Plan of Liquidation was dated May 2008. Clearly the CEO has done he best to delay the final distribution to shareholders.

Since the Plan of Liquidation was announced, the company has consistently paid out as they've wound down their operations. You can even see a history of the distributions on Google Finance. If the CEO had been interested in plundering the company, why would he have paid out 95% of the funds generated from the liquidation?

Raskolnikov

EoghanConway wrote: »

At it's most conservative, that is still over 10% in less than 10 days. It was a good pick (although truthfully I'm dubious about it's future).

It has no future. What it has is net cash and assets that (were) selling at below market price. I have looked at dozens of liquidations since I started investing. When a company formally announces that it intends to liquidate, in all cases, they have liquidated. When the financial statements gave guidance on a final distribution, in any case I've looked at, the final distribution nearly always exceeds the minimum suggested distribution. The worst liquidation I ever did was when the price I paid + brokerage costs just only slightly lower than the payout (the company was called Monarch Services). That liquidation was a heck of a lot more risky than this one.

If you pick the right deals (like I feel this one is), statistically, you do extremely well out of them.

drimadrian

Raskolnikov wrote: »

If the CEO had been interested in plundering the company, why would he have paid out 95% of the funds generated from the liquidation?

Because by only paying out 95% of the funds he effectively gets to keep his job and earn a salary. He is milking this cow for all he can get. It wouldn't surprise me in the least if he delays it another year as the statutory 3 year dissolution period doesn't end till 2012.

Per March 10K the stock that he was issued in lieu of a salary for 2010 was based on a share price of 23c. In the same SEC filing the net liquidation value of the company is put at $10m which equates to a share price of 42c. Who's kidding who here?

Onikage

Interesting stuff, all of it.

Raskolnikov

drimadrian wrote: »

Because by only paying out 95% of the funds he effectively gets to keep his job and earn a salary. He is milking this cow for all he can get. It wouldn't surprise me in the least if he delays it another year as the statutory 3 year dissolution period doesn't end till 2012

That makes no sense.

Firstly, his salary is high, but you have to remember that he was taken on the role of CEO, CFO and is responsible for winding the company up. Secondly, if he was as greedy as you claim, there was no reason whatsoever why he would pay out shareholders so much money. After all, he could have just took over a lousy business and kept himself in a job. He could easily have sucked out much more money from the company by not distributing funds.

drimadrian wrote: »

Per March 10K the stock that he was issued in lieu of a salary for 2010 was based on a share price of 23c. In the same SEC filing the net liquidation value of the company is put at $10m which equates to a share price of 42c. Who's kidding who here?

His salary for the year has already been paid (issued). I don't know where's you're getting your 42c share price from

If you have questions about Jonathan Couchman, I suggest that you just ring him for yourself, or write to him. If you don't like his answers, or you hear something disagreeable, then by all means share it with us. I am satisfied from speaking with him that his intentions are good, he understands he will gain most from a liquidation and that he is honest.

001 201 934 2000

Jonathan Couchman, 909 Third Avenue, New York, New York, 10022.

pocketdooz

Onikage wrote: »

Interesting stuff, all of it.

Agreed, we need more threads like this tbh.

.

drimadrian

Raskolnikov wrote: »

Firstly, his salary is high, but you have to remember that he was taken on the role of CEO, CFO and is responsible for winding the company up.

The company has had no operations since December 2008 so why on earth would they need high level management except to sign some papers? A secretary could do the job for 1/50 of the salary he is getting.

Secondly, if he was as greedy as you claim, there was no reason whatsoever why he would pay out shareholders so much money.

He is the majority shareholder as you have stated so why wouldn't he pay out 95% of the funds?

After all, he could have just took over a lousy business and kept himself in a job. He could easily have sucked out much more money from the company by not distributing funds.

It doesn't matter if he distributed 10% or 50% or 95% of the funds to shareholders the point is he is deliberately keeping the doors of this shell company open in order to pay himself a huge salary at the expense of the minority shareholders.

His salary for the year has already been paid (issued). I don't know where's you're getting your 42c share price from

Per 10K on March 15 he was issued stock with fair value of $500,000 or 2,173,913 shares which equates to 23c a share. In the same 10K they give a net liquidation value of $10m. Shares outstanding is approx. 24m so this gives it a value of around 42c per share. So what i am trying to say is that he was granted these shares at 23c even though at the time the NLV was 42c.

If you have questions about Jonathan Couchman, I suggest that you just ring him for yourself, or write to him.

The SEC filings tell me everything i need to know about this person. I really don't need to listen to some spiel about why he feels he deserves a salary of $850,000 for selling some real estate and signing a few papers.

I am satisfied from speaking with him that his intentions are good, he understands he will gain most from a liquidation and that he is honest.

Fair enough. This is what makes a market. Looking forward to seeing how this finally ends. GLTU

Raskolnikov

Cashed out of this @ $0.40. Don't recommend getting in at this price, but would certainly buy again in the mid 30 cent region if the chance arose and things hadn't deteriorated.

Raskolnikov

Maybe I sold out too soon. $0.05 dividend with more to come.

drimadrian

Raskolnikov wrote: »

Maybe I sold out too soon. $0.05 dividend with more to come.

Another dividend? But i thought they weren't going to declare anymore dividends until they sold the real estate? Here's the quote:

"On February 24, 2010, the Company announced it anticipates it will not make any further distributions until the monetization of the Mahwah Real Estate."

Change of plan? Why am i not the least bit surprised. Do you think he'll manage to squeeze another $500K "salary" out of this shell? He has till 2012 to dissolve this thing.

I have no idea why after this news you think you sold too soon.

Note: Forgot to mention this earlier but are you aware that stock options are taxed at approx. 15% as opposed to a salary which is taxed at approx. 35%. This Couchman guy has it all figured out. :cool:

Raskolnikov

Free money part 2

Cosine Communications are going private, to do this, they are cashing out shareholders who hold less than 500 shares for $2.24 a share.

http://www.sec.gov/Archives/edgar/data/1060824/000114420410055741/v200063_sc13e3a.htm

Buy 499 shares in COSN, make sure you use a limit order of less than $2. Current price is $1.92.

Wait for your $150 cheque to be posted to you, or €150 to appear in your brokerage account.

Cute Hoor

Raskolnikov wrote: »

Free money part 2

Cosine Communications are going private, to do this, they are cashing out shareholders who hold less than 500 shares for $2.24 a share.

http://www.sec.gov/Archives/edgar/data/1060824/000114420410055741/v200063_sc13e3a.htm

Buy 499 shares in COSN, make sure you use a limit order of less than $2. Current price is $1.92.

Wait for your $150 cheque to be posted to you, or €150 to appear in your brokerage account.

Looks good, appears to have closed at $1.875 yesterday, but only 500 traded so it mighn't be easy to get them. Why isn't everybody buying into this at a higher price than $1.90?

Is there a timescale for this reverse split.

Just noticed this as well which might suggest that they mighn't gp ahead with it.

The Board of Directors has reserved the right to change the ratio of the stock splits or to choose an alternative to the stock splits to the extent it believes necessary or desirable in order to accomplish the goal of reducing the number of record holders to below 300. The Board of Directors may also abandon the proposed stock splits at any time prior to the completion of the proposed transaction if it believes that the proposed transaction is no longer in the best interests of CoSine or its stockholders.

Cute Hoor

See the Cosine Shareholder vote on this is going to take place on January 10th, so it appears to be a done deal at this stage. Looks like this really was 'free money'.

Raskolnikov

Footstar are merging with CPEX Pharma. Share price has rocketed to $1. Sell, sell, sell and cash in a fantastic return now!

Mr_Roger_Bongos

Why are they buying out a shell company for just the land, paying a higher price for the shares than they were expecting to dispose of it on the open market?

I suppose you don't care now that the profits been banked!

Raskolnikov

Mr_Roger_Bongos wrote: »

Why are they buying out a shell company for just the land, paying a higher price for the shares than they were expecting to dispose of it on the open market?

I suppose you don't care now that the profits been banked!

I am stumped as how Footstar could acquire CPEX. They have no business operation to speak of, and they don't have anywhere near enough cash. Maybe they're going to do some sort of LBO? Maybe CPEX could use Footstar's tax carry-forward? All I know is that you would be mad not to sell now and bank a ~300% return.

Mr_Roger_Bongos

Raskolnikov wrote: »

I am stumped as how Footstar could acquire CPEX.

Sorry i assumed when you said "Footstar are merging with CPEX Pharma." that you meant CPEX were buying out Footstar, if it's the other way round then the share price increase makes even less sense

I thought the acquiring company's share price would generally fall in an acquistion...

Moonpig16

Raskolnikov wrote: »

I am stumped as how Footstar could acquire CPEX. They have no business operation to speak of, and they don't have anywhere near enough cash. Maybe they're going to do some sort of LBO? Maybe CPEX could use Footstar's tax carry-forward? All I know is that you would be mad not to sell now and bank a ~300% return.

Hey Rask,

Just wanted to say, the thread makes for incredibly interesting reading, well done. Good to see positive news. Now if only I knew a thing or two about the markets I would have the confidence to take some risks myself...

Cute Hoor

Raskolnikov wrote: »

Free money part 2

Cosine Communications are going private, to do this, they are cashing out shareholders who hold less than 500 shares for $2.24 a share.

http://www.sec.gov/Archives/edgar/data/1060824/000114420410055741/v200063_sc13e3a.htm

Buy 499 shares in COSN, make sure you use a limit order of less than $2. Current price is $1.92.

Wait for your $150 cheque to be posted to you, or €150 to appear in your brokerage account.

Well done on this one Raskolnikov, never easy to come up with guaranteed free money, today is the effective date for the reverse/forward split, so presumably the money will roll into the account shortly. Bought 440 @$1.88, so I make it a nice guaranteed profit of $158 or the guts of 20% in 2 months, won't make me a millionaire but every little bit helps as the woman said when .......