What Are Special Situations?
Special situations are corporate events that create investment opportunities independent of market direction. They require event-driven analysis rather than traditional valuation.
Types of Special Situations
Spin-offs
Parent company distributes subsidiary shares to shareholders. Often undervalued because:
- Forced selling by index funds
- Lack of analyst coverage initially
- Management now focused on single business
Restructurings
Companies shedding assets, cutting costs, or changing strategy. Look for:
- New management with track record
- Clear plan for value creation
- Improving margins
Bankruptcies and Distressed
Companies emerging from Chapter 11 with cleaned-up balance sheets. Highly risky but can offer large returns.
Rights Offerings
Companies raise capital by offering existing shareholders discounted shares. May signal distress or opportunity.
Key Skills Required
- Reading SEC filings and proxy statements
- Understanding deal structures
- Patience and discipline
- Strong risk management