Odd Lot Tender Alert: A Little Beer Money Before Christmas

Warren Buffett once famously told investors at the Berkshire Hathaway annual meeting one year he could earn 50%+ returns on a small sum of money. Here’s the whole quote:

I won’t suggest I could do the same with $1 million, or even $100,000. But I am fairly confident I could do a 50% annual return on $10,000. The only problem with that, of course, is it doesn’t really scale. That’s only $5,000 per year. It’s better than a kick in the yams, but not much.

This is something I’ll likely pursue in my upcoming retirement, for a couple reasons. Firstly, I plan to spend a lot of time reading about investing. Adding an hour a week to look at weird situations won’t be a big deal.

And two, I plan to spend some time golfing, and I figure it’ll cost me between $3,000 and $5,000 per year. The gains I get from this strategy will, hopefully, pay for my golf.

The strategy isn’t very complicated, actually. I would look for situations that only work with small amounts of money, things like merger arbitrage on small securities and, as we’ll talk more about today, odd lot tenders.

Those of you who have been subscribers here for a little while likely remember me talking about these tenders in the past. For the rest, here’s a quick refresher

The skinny

Many of you might remember AutoCanada (TSX:ACQ) from its days as one of the TSX’s premiere growth stocks.

The market absolutely loved this name about a decade ago. It was the only publicly traded auto dealership in Canada (and perhaps even North America), and everyone was convinced it would single-handedly consolidate the incredibly fragmented Canadian auto dealership market, which is still mostly owned by a few corporate entities and a hodge podge of individual owners.

After that brief foray into growth investors’ hearts, these days AutoCanada is loved by value investors. The company generates large amounts of cash flow and trades at a cheap valuation on a price-to-free cash flow metric. It’s diversified into collision repair, something widely considered a better business than the traditional auto dealership model. And the growth story is still intact. Most of the boomers who needed to sell a decade ago still need to sell today. You’re no longer paying a premium for that growth, too.

Management is doing the prudent thing and taking advantage of what they view as an overly depressed stock price. The company announced it would be willing to repurchase approximately 7% of all outstanding shares at a range between $25 and $28. Shares shot up to a hair over $25 on the announcement and currently trade at $25.84.

The offer has an odd lot provision, meaning any investor who tenders that owns less than 100 shares gets first dibs on their tender. Anyone with an odd lot isn’t subject to the same pro-ration rules as everyone else.

The details of the deal are fairly simple. Buy 99 shares for the current market price of $25.84. Sell at $28. After commissions, pocket approximately $200. Do this in both you and your spouse’s TFSA and it’s enough for a few nice meals, an overnight trip, or a good Costco run. Or, in my case, about a month’s worth of rounds at the local links.

The risks

There’s really only two risks here.

The first is what happens to the share price over the next month. This offer expires on December 16th, meaning you take the risk that the company’s share price is going to hold up relatively well between now and then.

As it stands today, my strategy would be to buy and tender at $28. But if the price falls to say $23 per share, prudent investors would come in, buy, and then tender for $25. You’d then be stuck with shares that aren’t worth what you paid for them.

This risk is mitigated by doing your research beforehand and only entering into situations where you’re happy to own the stock even if the tender doesn’t work out. You’ll have to make that decision for yourself personally, but myself I’m pretty okay owning a stock that trades at just 5x trailing earnings that I think holds up pretty well during the next downturn. I’m also pretty encouraged by these share buybacks. Gobbling up cheap shares at a depressed valuation is generally a good idea.

The second risk is the company gets cold feet and cancels the odd lot provision. It’s unlikely, but has happened before. Generally we’re pretty safe unless the rest of the investing world picks up on these situations. So please, just tell 100 of your closest friends instead of 1,000.

There’s also the chance the tender offer gets pulled altogether, but that’s exceedingly rare.

The bottom line

As mentioned earlier, the big problem with odd lot tenders is they don’t really scale. You’re stuck sitting around waiting for one of these to appear. Especially if you’re just working in Canadian Dollars and are looking for opportunities inside our borders.

Still, as a small portion of a diversified portfolio for a retail investor, I think these opportunities make a certain amount of sense. Sniffing out the deals is the hard part. Once you have a prospect in place it doesn’t take much work.

The process to tender your shares may be a bit of a pain in the ass as well, depending on your broker. Some require you to call in and talk to a real person. Others mercifully have an online portal that allows you to submit your request.

These aren’t complicated, there isn’t huge upside (at least in $$$ terms), but they are a fair bit of fun. At least in this author’s opinion. And they’re good for a little extra beer money.

Disclosure: Long AutoCanada