The Great GAPsby: A Story from a long-time MT Long
In Jan, the stock was about $17. Since then, the stock has declined and the Bears would have you believe that the outlook for this company is far worse than it was during the Financial Depression in 08/09. Doesn't make any sense, but that is their story. You also see a lot of fresh new Id's swarming this msg board telling you to sell and the stock is going to single digits. They are right. But nobody knows the real WHY. Here it is.
MT issued mandatory convertible notes (MCN) in Jan. They got necessary financing at a decent interest rate and the market has punished the stock $6 or 30+%. At this rate, the largest steel producer in the world will be bankrupt by the end of the year. At least that’s what the market seems to believe. Here’s the real story. When convertible notes are issued, 75% of them put on a short hedge. Funds will piggyback this trade by going short alongside them because it is a known ceiling resistance being built on the equity at the conversion price, near $17 in this case. The MCN holders plan to first double their money on the short hedge even before they earn any interest on the Notes. How do they do that? They cut the stock in half from $17, and cover their short position when the stock is trading in the single digits. After that, they’ll essentially be looking at a risk-free trade whether they put the short position back on near the conversion price level again or not. Now, you aren’t supposed to know this. You are supposed to believe that MT has no potential for recovery. The strategy depends on you selling the stock at even further depressed prices than today’s $11-12. The converts are Mandatory Convertible in 3 years, if the holders don’t elect to convert sooner. Don’t expect them to convert sooner than 3 years. [continued]
So I’ve told you WHY the stock is headed to single digits. Now I’m going to tell you WHY the stock will be worth $35 within 3-5 years. If you’re Long at higher prices than today, you need not fear. How do I know? You see, once these sophisticated traders double their money on the Dark Side (short), they will also make their money with The Force (long). That means the stock will be worth double the conversion price, or around $35, assuming MT doesn’t in fact ever file for bankruptcy. There are so many open Gaps left to fill to the upside that it looks like Christmas morning to Traders. Add in the well-known predictable 5-7 year cyclicality of the industry, of which we are still in the downturn of, and the fact that this company is run by one of the best management teams in the industry lead by the Indian Warren Buffett himself, Lakshmi Mittal, and you have a recipe for the gift that keeps on giving if you are Long and Patient.
Since you now know the truth, not only do you not have to sell in a panic, you can buy more with conviction today at $12 and in the future at single digits if/when we get there. Collect and Reinvest those dividends while you sit back and wait. You will thank your lucky stars you read this post in 3-5 years. You see, I’m still the same guy that played this same cyclical story over 10 years ago when I started buying the stock near the same price it is today. Go figure. Back then, the position went up 4-5x before all was said and done. This time around, I’m only expecting about a triple from $11-12 if you have the time.