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 Indeed, Citywire reported on 5 November that investors had already withdrawn around £1bn.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.
