Investopedia defines ‘Special Situations’ in the following manner:

A special situation is an unusual event that compels investors to buy a stock or other asset in the belief that its price will rise.………

Special situation investment opportunities can take many forms and involve a number of asset classes. They often arise from breaking news stories or rumours of news about to break. They may concern spinoffs, tender offers, mergers, acquisitions, bankruptcy, litigation, capital structure dislocations, shareholder activism, stock buybacks, and any other event that might affect a company’s short-term prospects.

I’ve always enjoyed looking for investments in small cap companies that are out of favour because they appear broken, and as a result trade at large discounts to their peers or potential. Companies that are undergoing change, or likely to restructure their balance sheet, share or management structure, often can present opportunities for investors who don’t mind doing a little research and placing educated bet on the outcome.

Educated is the key. If you are going to speculate on a company re-capitalizing, writing off debt, divesting unprofitable divisions or going private or public, it behooves you to know, in basic terms, how capital markets and business generally works. You don’t have to be an expert. But you do have to know your way around enough to develop a thesis that is based on some reality other than hope.

I think the key here is to spot an opportunity that is broken down by the side of the road. Pull over, lift the hood, make an evaluation, and decide two things – 1) Is it fixable, and how, and 2) Is management willing and able to do what is required?

Case in point. I’m acquiring the shares of a mircocap company right now that is restructuring. And part of that restructuring is a share consolidation. Everyone hates a share consolidation. Typically, amongst small and micro caps, a consolidation occurs as a result of 1) too much share issuance for too long, resulting in a massive amount of dilution to shareholders which needs to be cleaned up, or 2) a restructuring of a company at some level during which the share float and price has to be ‘fixed’ to become more attractive to investors. Its often a sign something was broken.

But – A share consolidation is also an indicator that change is afoot – An invitation to have a closer look at what is transpiring and why.

So here is a DTM5 tip…..share consolidations occur because things didn’t go right or as planned, and things need to be cleaned up…..And are being cleaned up! It doesn’t make every company that consolidates a good investment, but it can be a useful scouting tool.

GLTA!