Investment Thesis – note to self

I was chatting to an old colleague last night who just happens to run the Asia-Pac division of a large medical equipment company.

He was telling me that they are very profitable and grow at a very reliable rate every year despite what the economy is doing, because people continue to get sick and prioritise their health over other expenditure.

Their company stock is well covered by the analysts so there it is as steady as a rock, slowly rising with the market size and slightly enhanced by the company’s tendency to spend excess cash on share buy-backs.

There is little chance that they will be the subject of a take-over because that would cost an unjustified premium to market cap (the stock is fully priced) and being extremely technical, there are little synergies to made from a merger.

However there is activity by activist shareholders. Rather than taking over a stock these guys just get a minority position and hassle the board and management through every trick in the book.

What they are after is an increase in net profit from 20% to 25% by cost cutting measures like moving the finance department to India or cutting R&D.

Once their goals are achieved they sell their stock for a premium and move on, leaving the company a stressed entity because all those cost savings probably destroy the company’s ability to compete in the long term.

So my opinion is that a fool proof investment plan would be to identify these companies and activist shareholders and then invest in derivatives, on the upside when they just start and on the down-side when they are just about done.

Given that the underlying asset has such rock solid value this is a very low risk profile derivative play.

I will share the idea with some innovative investor mates and see what they think.