Jim Osman on How to Spot a Special Situation in the Making

When expert investors start considering a stock, one of the many things they’re looking for is a catalyst to drive upside in the shares. Special situations often provide exactly that sort of catalyst, but the best situations can be notoriously hard to predict.

In an exclusive interview with Hedge Fund Alpha, special situations guru Jim Osman, founder of The Edge Group, shared his secrets to winning in the market — and how to spot potential situations in the making.

What constitutes a special situation?

Osman’s rationale behind special situation investments is that investors need something that will move price to value. He feels that the best plays in this area are often corporate events, although they don’t necessarily have to be something big like a breakup or turnaround. Osman noted that special situations can be more subtle, like insider buying or anything else that signals a change in price.

“To be able to quantify that event is what I call a special situation,” he explained. “And it's not naturally seen on a normal pair of eyes. So you need to dig. And that's where it gets interesting, because most people in this world today want it in front of them. They want to go, ‘Hey, you know what? These things are going to go up because of this, because of that.’ And frequently, that stuff's in the price. But special situations, you need to do the work. And it pays off."

Osman added that any situation that can move a stock from price to value can be a hard catalyst, while spinoffs or turnarounds can be more of a soft catalyst.

Secrets to winning

One of Osman’s big secrets to winning in the stock market is to look where other investors aren’t looking, which he said is easier said than done.

“If everyone's on something, and you're late to the table, well, do we all just buy it and it goes up and we make lots of money? It just doesn't happen that way, unfortunately,” Osman explained. “So you really got to be different.”

In addition to looking where others aren’t looking, which can often be special situations, Osman also advises investors to be contrarian, look for an angle, and find an edge beyond what other investors are seeing.

Winning with Boeing

“So we looked at Boeing when it was down on its knees at $139, and the plane crashes and all that sort of horrible stuff as well,” he shared. “But you know what, the company just displayed [that] the breakup value was double. So there was a good margin of safety, which should always be risk first. There was a good chance that if it did break up, we would get that double in the price. But also if we were buying at that price, there was a good limit to our downside. So we bought at $139, and the rest is history.”

Over the last six months, Boeing has soared to $230 a share, turning into a big winner for Osman.

In addition to traditional areas like valuation, he said an investor’s edge could also be behavioral in nature, meaning that everyone else hates the stock, like they did Boeing. Osman also advised investors to look for an analytical edge, which he said closely accompanies a behavioral edge.

Telltale signs that a special situation is developing

Investors on the hunt for special situations are looking at companies from all angles, including insider dealings, spinoffs, turnarounds, and others. They’re looking for the unusual — anything that’s not normal.