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Wednesday, 26 September 2007

To Buy or Not To Buy, That is the Question

Over the past year I've built up a large parcel (124,000) of Options to purchase ING Private Equity (IPE) shares at $1.00 each. The options only cost a couple of cents each on average, so my total investment is around $2,500. The original plan was to hopefully sell them at a profit before the expiry date at the end of October - just a few percent rise in the IPE stock price above $1.00 would cause the IPEO price to double from 2c to 4c...

However, as the chart below shows, IPE has stubbornly refused to move more than a few cents above the $1.00 float price, despite the Australian stock market hitting all time highs in the past couple of days. I had expected the IPE price to climb back to over $1.10 (which it reached in July), but it has refused to rise above $1.03 despite the diluted NTA of the shares being an estiimate $1.20 or more. I had a feeling that once the options have expired the IPE shares may increase to "fair value" of around $1.20 - but to benefit from this I would have to excercise the options at $1.00 each. Betting $124,000 on such a "hunch" is a bit risky, although unless there is a massive market plunge the IPE price shouldn't drop below their recent low of $0.95. This would mean a loss of around $5,000. Perhaps it is worth taking the plunge and funding the options excercise from my available margin loan credit.

The alternative would be to sell my options at the current price of 1.3c - which would mean crystalising a much smaller loss of around $1,000 on my IPEO investment. Decisions, decisions - at least I have until the end of next month to decide one way or the other.

Copyright Enough Wealth 2007


mOOm said...

This seems similar to my investment in AEP (Allco Equity Partners) which I bought after the Qantas debacle. I've made a couple of thousand so far, but the shares are still trading well below book value. I think the reason for this is partly the uncertainty caused by Qantas still lingering but also that a large investor (Liberman family) want to get out. Allco are putting together a deal to buy their shares in a complicated option agreement. Question is, in your case what is keeping the share price down from where you think it should be? And will this change? $A124k is a big bet if you are wrong.

Rocky said...

The fact that there are a lot of people like yourself accumulating these options will dillute the share price and it is definately keeping a lid on the price because as soon as it becomes economic to exercise, take delivery of the underlying and dump the stock, people will do it. Hold the stock if you are a fundamental believer in it, and ditch it if you're not. said...

I can't be bothered looking up the figures (shows how much effort I put into researching my investments!) but from memory the current (undiluted) NAV is estimated to be around $1.40 per share. If all the options are excercised (at $1.00 each) the fully diluted NAV is currently estimated to be around $1.20.

It all sounds good on paper - the NAV estimate is supposed to be quite conservative (traditionally the realised price of private equity investments when sold is usually higher than the book value), and with the share price hovering around $1.02 a lot of the options may lapse which would mean the NAV doesn't get fully diluted...

Then again I've had a few stocks go bad that looked fine on paper, which is where the risk part of the risk:return equation kicks in.

I'll keep an eye on the stock price over the next couple of weeks - if the options get above what I paid for them I may sell 74,000 and pay up the other 50,000

S. B. said...

Perhaps you could re-frame the question to avoid letting a past decision affect your current one.

Suppose you had never bought the options at all and were simply evaluating the stock for possible purchase now. Would you invest $124K in IPE at $1.02 on margin? (Or would you do so at the end of October assuming the same price?)

Another hypothetical: Suppose on July 20 you had sold your options for 10c, pocketing a $7,500 gain. Would you still invest $124K in IPE at $1.02 on margin?

As you can see, I am concerned that perhaps you are trying to mentally link a small loss from the past with a potential future gain in order to integrate the loss. Perhaps not, but frankly we all do this from time to time, so I would just caution to make your decision based solely on your expectation of the situation going forward. said...

My expectation is that IPE will eventually trade closer to their NAV - and that this is likely to happen once the options expire. My feeling is that the fact that the options entitle shareholders to "buy" IPE shares for only $1.00 plus the option cost (currently $0.013) is what is holding the IPE price down around $1.02. Once that pricing is no longer in play the IPE stock price should start to move with the market and underlying NAV.

Since the IPE shares didn't trade below $0.91 in the past year, I think my downside risk is realistically around 10c per share - a potential loss of $12,400 if I exercise all my options.

On the upside IPE could reach NAV fairly quickly, which would mean a profit of around 20c per share.

I don't think I'm mentally trying to end up with a profit on the options trade - I "wrote them off" as a speculative bet when I bought them. But, having said that, I wouldn't be thinking of buying $124,000 worth of IPE shares if I didn't already have options to buy them for $1.00 each.

But a 2% discount to market price is hardly enough reason by itself to invest 10% of my net worth in one stock.

On the other hand...