I’m going to share some of my views on Outotec from a trading perspective, as their merger is nearing completion.
The negative share price reaction to Outotec has been swift, with about €220 million evaporating from its value in a couple of weeks. There’s likely no single clear reason for the decline. The virus, potential delays in investment decisions, and a slowdown in the Chinese economy are all presumed to have an impact. However, I’m not worried about the virus or its spread, but rather, for example, about China’s economic growth prospects in the longer term and the stalling of Outotec’s and the industry’s nascent longer-term upward trend. The market outlook in the earnings release will therefore be interesting.
I would estimate that as soon as the number of suspected virus cases stabilizes and even begins to decline slightly, share prices will start to make clear corrective moves. It’s difficult to estimate the timing, but mass sentiment will likely shift very quickly as news becomes more hopeful, which is completely understandable. Sensationalist reporting and fear-mongering have also been important for controlling the spread of the virus. Of course, the official figures reported are not entirely accurate, but they can be used to assess the situation and contextualize the virus’s true severity. The number of recoveries has also started to rise, from which one can deduce the duration of recovery and, in a way, guess the length of the market disruption caused by the virus. Ultimately, it’s unfortunate that as part of my trading strategy, I have to utilize graphs of sick and deceased Chinese individuals.
The market has not fully come to an agreement on the market values of Outotec, Metso, and Neles. Numerous larger industrial mergers in previous years suggest that the share price of the divested Neles would be higher than the current price (now €10.20/share) after the merger, also benefiting the smaller divested company. Neles’ share price has fluctuated between approximately €8.70 and €14.00/share since the merger news in the summer, reaching a low of about 25.4% and a high of a whopping 38.9% of Metso’s market value. Initially, the pricing error was clearest at nearly 39%, but after the release of Metso/Neles figures, the percentage range has leveled out to approximately 25.4-34.2%, as Neles’ value could be calculated more accurately in light of the numbers. Prices have been calculated assuming that the market has always priced Outotec correctly at the end of the day. Everyone can calculate and guess Neles’ correct price if they wish, which today is 31.50% of Metso’s price. Inderes’ report provides additional figures that supported my own calculations. If the situation remains stable, it appears that in this equation 1+1+1 is greater than 3, so owning Metso at the time of the merger could also be profitable.
What has made the situation interesting is that Metso’s share price increase has always supported Outotec as well and has so far prevented larger drops. The price increases have provided justified buying opportunities, and until now, they have almost without exception favored buying Outotec. A large drop in Metso’s share price is certainly possible, and it could quickly reverse the situation, as Neles might then become cheap. For Outotec, I have calculated a moving support level, below which would likely require a broader market collapse, a clear weakening of Metso’s results and a share price dip, a broader stalling of the industry’s market outlook and/or order book, or the cancellation of the merger. The technical support level, on the other hand, hovers around 5.00-5.08, but with low trading volume, a momentary slip below it can easily occur. When making Outotec purchases, I assess the Risk to Reward, and so far, it has been very good at these price levels. The Hit Rate for Outotec’s stock has also been excellent, and if my current Outotec buying program fails, I would only drop to my target level of 80%, so I believe my trade is worth the risk.
Most cyclical stocks are shorted by some percentage and can be part of a hedge strategy, so paying too much attention to them ultimately messes up one’s own investment strategy. Of course, short changes need to be monitored and utilized where possible. It is also difficult to guess what strategy individual short positions are built upon. The latest short was recorded on January 24, 2020, is 1.61% in size, and opened around €6.00.
Apologies for the overly long message, any obvious statements, and bringing the virus into this thread. I added the second to last batch of Outotec @5.152.
The previous purchase before this was at 3.7€ and I sold in the summer (with a good profit, but I’m not going to guess percentages now as I don’t remember) unfortunately a couple of days before the merger announcement. If it drops sharply tomorrow, I’ll jump back in before the earnings release 
