Pender Podcast PM Series: Catalysts Over Consensus, A Framework for Special Situations Investing

Pender, welcome to the pod.

Hey,

Laura.

Pleasure to be joining you.

Yeah.

So maybe let's start right off from the beginning.

How would you describe a special situation?

So I think about special situations as an investment where something is changing.

So this can be an event like a corporate action or a balance sheet change or some other sort of identifiable catalyst that can either materially alter the value of security.

Traditional equity investing is always asking, you know, what will this business earn five years from now? And what multiple should I be willing to pay for it? And we certainly care about those things.

But in special situations, there's another dimension.

So it's also what is going to happen between now and then that changes the market's perception of that value.

So that can be an acquisition, a refinancing, a strategic review, a rights offering or spinoff.

So when we underwrite a business, we're underwriting both the business itself and the path at which the value actually gets realized within the security.

Yeah, no, it's interesting when you talk about kind of the funds strategy and that.

maybe the catalyst itself might be different from fundamental investing, but you still actually have to do fundamental analysis.

Like you're trying to understand the business and what it's worth.

You're not purely looking at a situation blind, right?

Yeah, absolutely.

So it's still a fundamentally driven process.

We're just looking beyond, you know, the long-term fundamentals of the company to actually identify meaningful and specific catalysts that will actually unlock that value.

Yeah, for sure.

So maybe explain a little bit more why these opportunities do exist in public markets in the first place.

And if we always are told markets are so efficient, why isn't the market simply pricing in the catalyst correctly?

So I think I agree that markets are broadly efficient and arrogant.