Renault interested Romick because it was associated with two of his favorite criteria – an out-of-favor industry and lots of bad news. The auto industry has suffered, but Renault, an auto manufacturer, is based in France, where new car registrations declined 13.8% from January to September 2012 compared to the same period of 2011. More broadly, in the EU, the new car market contracted by 7.6%.
The bad news emanating from Europe in general drew Romick’s attention there, but he goes about seeking investments in distressed environments through a specific lens. “Wherever there’s bad news we go and look,” he said, “and we say, ‘Is there something we do?’ And figure out how we can potentially take advantage of what we feel are forced sellers. We don’t want to buy from the after sellers. We don’t want to buy an IPO from the smart private equity guy who’s selling his stake out. We want to buy from people who are forced sellers who need the money for something else or just because they need the money to have the cash because they’re too scared to own it.”
Renault is attractive because it owns 44% of Nissan, 7% of Volvo and less than 2% of Daimler. The huge store of value in the investments, he said, exceeds the value of Renault’s common stock price.
Currently, Renault has a market cap of $10.32 billion. Shareholder equity, including its Nissan, Volvo and Daimler assets, was about $32.66 billion as of June 30, 2012.
If Romick goes long Renault, which appears overvalued, and shorts Nissan and Volvo, which appear overvalued, he can make money as the prices reach their fair value.
Romick owns 1.95 million shares of Renault SA, equivalent to 0.94% of his portfolio. The stock has lost 66% over the last five years and gained 32% year to date.
In a May investor letter, Romick also said that he had traded Renault profitably in 2006, but believed it had a “healthier balance sheet, better geographic mix and improved profitability” since that time. At year-end 2011, Renault had 9.9 billion euros in cash and 48.4 billion euros of total liabilities. Its net income was 2.1 billion euros, or 7.68 euros per diluted share.
Money managers typically do not report the size of their short positions, but Nissan’s stock has declined 1.57% year to date; Volvo gained 18.5%.
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