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Tuesday, August 23, 2011

The devils in the details

As some of you may or may not know I am a big fan of special situations - specifically risk free profits. I make a point to search PRE-14C filings to identify opportunities (specifically reverse splits or tenders) where I may be able to pick up a few bucks here or there. One such opportunity came across my radar today.

Read the press release here.

Here is the release pasted in case you are reading this via a feed:
"KENT FINANCIAL SERVICES, INC. ("Kent") (NASDAQ: KENT - News) On August 22, 2011, Kent's majority owned subsidiary, Kent International Holdings, Inc. ("Kent International"), filed a Schedule 14C Preliminary Information Statement with the United States Securities and Exchange Commission (the "SEC") in connection with a proposed "going private" transaction. The proposed transaction involves an amendment to Kent International's Articles of Incorporation to effect a one-for-950,000 reverse stock split. If implemented, fractional shares will be redeemed by Kent International for cash consideration of $2.50 per pre-split share."

So people read this got all excited and went out and bought KENT. KENT previously closed at $1.12 and opened today at $1.99 - as "traders" sought to bridge the gap close to the $2.50 tender. So the stock was up nearly 70% as of this writing.

Here is the kicked - and a quick test - what was wrong with this situation?

For those of you with a sharp eye you will notice that Kent Financial KENT is the parent company that happens to own shares in its subsidiary Kent International. Which company is actually doing the reverse merger - Kent International (KNTH). Low and behold people bid up the wrong stock -KENT.

As the market slowly finds this out I wouldn't be surprised if KENT drops down near to where they traded before.

This just goes to show you the devil is in the details and it pays to read closely. I hope people who bought KENT on the hopes of the proceeds paid in the reverse split read this post and realize they bought the wrong security.

I looked at shorting KENT as I think it is a good opportunity to play the snap back as people realize there is no $2.50 coming their way. But at the end of the day I don't really know much about KENT's underlying business so I was a little reluctant. That being said I fully expect it to drop back to near where it was trading - so a 30% - 40% decline.

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