Sometimes I like to buy investments that are trading at a clear discount to underlying value, but with absolutely no catalyst in sight to narrow it. Burelle (EPA:BUR) was certainly one of those ideas: it’s a holding company with a large stake in Plastic Omnium (EPA:POM).  I wrote it up in 2013 when it was trading at a discount of roughly 50%, and since then Plastic Omnium has performed very well, but the discount has only shrunk slowly. However today, Burelle’s share price jumped with 7% while Plastic Omnium stayed almost flat reducing the discount to 34%:

As far as I can tell the only reason for todays market move is this article in the French Financial newspaper called Les Échos. An unexpected catalyst, but I’ll take it. A discount of 34% is not bad, but obviously a lot less attractive than a 50% discount and since I’m at the moment almost fully invested raising a bit of cash for potential new ideas is not a bad move. So I decided to exit my position in Burelle.

During my four year holding period the stock generated an total return of 236% and an internal rate of return of 34.1%. This compares favorably to an investment in Plastic Omnium itself which would have returned 189% during the same period for an IRR of 29.8%. So most of the return is definitely caused by the strong performance of the underlying stock, but at the same time this result shows the power of just buying stuff at a big discount. Having a discount shrink from ~50% to ~35% during a four year period sounds like a very marginal result. At the same time it’s enough to add almost 5% alpha annually for four years, and that is huge!

Disclosure

Author has no position in Burelle anymore