Sunday, October 29, 2017

ABB : a bearish strategy opportunity (in the short-term).


OVERVIEW

ABB, aka accelerated book building, is a procedure by which institutional investors are given significant shareholdings. It is an operation to get capital quickly (for M&A reasons, for debt refinancing and so on). 

The main benefits are the following :
  1. The speed of the procedure ; it takes about one or two days and it doesn't need any advertising (like the IPOs) ;
  2. The placement of the stocks is directly on the institutional investors and not on the market ; it means that the market is not always able to absorb such much stocks in a short time. 
The main disadvantages are the following :
  1. The ABB provides a discount for the institutional investors who buy the shares ; usually, the range of the discount is between about 1% and 5%. That range is their profit margin. In this way, the market reaction is negative, at least in the short-term ;
  2. Linked to the previous point, there will be most likely a market dispersion among all the stockholders. 
From a statistical point of view and in order to build a trading strategy, we must consider some examples, in the history of the financial market. As already announced, the ABB will produce probably a downward pressure on prices, for the aforementioned reasons, in the short-term. On the contrary, in the long-term, it could be a bullish strategy opportunity : it means buying a stock with a cheap price, buying the quality at good prices (of course, the second scenario requires a study and other conditions, to set a pure value strategy or a "buy and hold" strategy). 

CASE-STUDIES

About citing the examples, see the following links (TOD's and Brunello Cucinelli) :

  • https://www.marketwatch.com/story/mediobanca-places-10-of-tods-shrs-at-eur76shr-for-eur2326m-2010-12-15. We speak about TOD's S.p.A. The package was equal to the 10%. The price was set at 76 EUR/share. As shown in the chart (see the circled area), we can notice the classic gap down after the ABB and consequently, a bearish performance in the following days. The discount was huge, about the 9.50%. After the ABB, the market price aligns itself with the transaction price, theoretically. Indeed, from about 84 EUR to 76 EUR. Then, in medium/long-term the performance became bullish (see the red arrows). 

Chart from Investing.com


Chart from Investing.com

Recently, the case of  Moncler S.p.A. For further info, consult the link :
https://fashionunited.it/news/business/moncler-eurazeo-ha-venduto-un-altro-3-3-percento/2017102616444. The discount is much smaller than the previous cases (about the 0.85%). For this reason, the market reaction is not so negative. Anyway, we must consider the following trading sessions to confirm that. See the chart and the gap down immediately covered. 

Chart from Investing.com

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