This Special Situation Is Telling Me To Buy Wm. Morrison Supermarkets plc

G A Chester is excited by a ‘special situation’ at Wm. Morrison Supermarkets plc (LON:MRW).

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m convinced there’s a ‘special situation’ opportunity emerging at Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US).

What is a ‘special situation’? Well, there’s no tight definition. Broadly, a special situation arises when some out-of-the-ordinary circumstance creates a pricing anomaly in a stock from which an investor will profit when the situation plays out.

Of course, correctly identifying that the situation is special, that it is creating a pricing anomaly, and that the situation will play out in the way expected (profitably!) is the secret to success.

Here’s my analysis of the special situation I’m convinced is in play at Morrisons.

Background

On 15 October, top UK fund manager Neil Woodford announced he would be leaving Invesco Perpetual next April to open his own fund management business.

Woodford said Invesco’s flagship Income and High Income funds, and others he headed, “will be transitioned into the hands of my long-standing, experienced colleagues”. Mark Barnett, who has worked alongside Woodford for 17 years, will take the reins of the giant Income and High Income funds when his mentor departs.

A difference of opinion

At the time Woodford announced his plans, Invesco held 133,357,656 Morrisons shares, worth £374m — or 5.7% of the £6.5bn company. The vast majority of the shares — 120,614,284, according to Invesco’s most recent reports at the time — were held within the Income and High Income funds.

Now, the holdings of the three funds Barnett currently runs have a good deal in common with Woodford’s. However, Barnett’s funds don’t hold Morrisons; in fact, Barnett sold all the supermarket’s shares from all his funds sometime between 1 October 2012 and 31 March 2013.

Special situation

Woodford is hugely popular, and many investors are expected to pull out of Invesco’s Income and High Income funds to ‘follow the manager’. Indeed, Citywire reported on 5 November that investors had already withdrawn around £1bn.

Much of Woodford’s energies between now and April are likely to go into managing share sales to meet client redemptions, and into what he described as transitioning the funds into the hands of his successors. In cashing in shares, I would expect Woodford to prioritise disposing of companies that Barnett has no interest in holding. It looks to me like that is happening with Morrisons.

Last week, Morrisons announced that on 7 November, Invesco had sold 22,275,132 shares — 16.7% of the 133,357,656 shares previously held. With the average daily trading volume of Morrisons’ shares being around 1/20 of Invesco’s total shareholding, it seems to me that the special situation of Woodford’s departure is set to create a pricing anomaly in the supermarket’s shares — and perhaps already is.

At the time of writing, Morrisons’ shares are trading at 267p, which is 12% down from their 52-week high achieved as recently as mid-September. This means Morrisons is already the ‘best value’ supermarket on the block, rated on 10.8 times this year’s forecast earnings with a dividend yield of 4.8%.

One tactic I’m pondering is to buy some Morrisons shares now, and add more if there are further sales by Woodford producing further share-price weakness.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended shares in Morrisons.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »