How do you make money in the stock market? You buy low and sell high.
Pretty simple right?
It’s simple but not always easy. What you think might be a low price could be far above the bottom. This strategy is used by almost every successful investor. I say almost due to the momentum traders who might buy high and sell higher.
Buying low generally means you need to buy a company when it’s out of favour. The company either missed on their profit guidance or they incurred unexpected costs along the way. This happened to the high growth telecom Vocus Group Ltd [ASX:VOC].
An opportunistic bid
On 2 May Vocus announced that profits for financial year 2017 would be revised down from $205-215 million to $160-165 million. The stock fell almost 30% in the days after the announcement.
Soon after, private equity firm, Kohlberg Kravis Roberts & Co. (KKR) show up with a $2.2 bid for the company. Of course they are trying to take advantage of Vocus’ depressed price.
As reported by the Australian Financial Review:
‘Vocus Group’s largest shareholder believes Kohlberg Kravis Roberts & Co’s $2.2 billion bid for the telecommunications business is taking advantage of a depressed share price and company’s assets will deliver higher earnings in time.
‘David Pace, portfolio manager at Greencape Capital, which owns 8.1 per cent of Vocus, said KKR’s offer takes capitalises on a trough in earnings.’
I doubt the Vocus board will accept the bid. These kinds of opportunistic bids happen all the time. At the start of this year, the same thing happened to Spotless Group Holdings [ASX:SPO].
The stock price had been depressed since 2016 due to traditional moves. But as soon as Spotless hit a low in 2017, the conglomerate, Downer EDI [ASX:DOW] made a bid for the company.
Junior Analyst, Money Morning
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