jebmo’s posthaven

After a long and winding 2016, we reach another holidays season. As we have done for several years, we are checking in with some of our top authors for their views on the coming year and beyond. Our panel includes experts on a range of different asset classes and investing strategies As always, the focus is on an overall approach to portfolio construction and investing outlook.

We start with M&A and value investing with Chris DeMuth Jr. Chris is the founder and chief investment officer of Rangeley Capital LLC. He is also the founder of Sifting the World, the leading subscription service on Seeking Alpha's Marketplace. As ever, he has been an active participant on Seeking Alpha, primarily through the M&A Daily, a daily look at mergers and acquisitions, as well as other corporate transactions that are catching Chris's attention. He's also recently been sharing some of his top picks for 2017.

Fortunately, he had enough time left over to respond to a few questions from Seeking Alpha Managing Editor Daniel Shvartsman about bargain-hunting and M&A in 2017.

Daniel Shvartsman: 2016 sees us carry through the 8th year of this bull market, and since the election the market seems to have gotten new legs, especially in the small-cap space. For bargain hunters, this seems like an unfriendly climate, but you could say the same about the last 2-3 years. Where are you looking for mispricings, and what sorts of opportunities do you anticipate in 2017? Has anything changed in your estimation of the amount of opportunities available?

Chris DeMuth Jr.: We don't expect the next eight years to be much like the past eight. The overall equity market is fully priced. Historically, markets at this level do not offer any prospective positive return over the subsequent year. The overall bond market is even more expensive. Yet, we are still finding both stock and bond opportunities. Our best opportunities are primarily among small caps, in corporate transactions - especially ones that have already run into trouble - and in opportunities to create our own luck.

DS: You've mentioned elsewhere that M&A in the banking sector was a big theme in 2016. Are there any sectors where you expect to stand out in the M&A market in the 12 months to come?

CDM: There are still thousands of small banks that should not be standalone public companies. This sector still has at least another year of robust consolidation. If you are on the board of a sub-billion dollar bank, you should have a plan to grow or get bought.

From the shareholders' perspective, the costs of being a public company are just too high for any bank beneath a billion dollars of assets. There is an expensive and onerous regulatory burden and a distraction caused by senior management wasting much of their energy and focus on regulatory compliance. But diluting that waste across a larger organization makes it easier to survive.

DS: In last year's conversation you talked about taking advantage of areas where market participants have panicked. Do you see any similar panic-induced sectors that offer opportunities to invest in as we enter 2017?

CDM: Drugs and oil. I don't see anywhere near the panic in any other sectors. Both pharmaceuticals and energy should have a lot of activity in 2017 from M&A to bankruptcies. We will be taking a close look at both. But for me to get really interested, typically something has to have happened that went dramatically wrong, such as a drug failure driving the share price beneath the value of cash on the balance sheet.

DS: You wrote a letter to the board of a portfolio company earlier this year. It's not the first time you've taken an activist role. What leads you to 'go active' on a company, and what have you found or learned from the experiences? Does the approach lead to any new risks?

CDM: I have never made a distinction between passive and activist investments. We always have a view on the optimal business strategy. That view is frequently consistent with management. In situations where we agree, such as was the case with Gramercy (NYSE:GPT), we can be management's biggest cheerleader. When differences can be resolved amicably, there is no need to publicize them. But occasionally, managements are intransigent, as was the case with OBA before it was sold and Ocean Shore before it was sold and Middleburg before it was sold and now such is the case with BNCCORP (OTCQX:BNCC).

DS: Any less practiced investing strategies or tactics you might employ in 2017, ala the activist route?

CDM: Yes.

We will be employing each of the investing strategies that we normally do. But there will probably be more short opportunities, more bankruptcy opportunities, and more opportunities higher in the capital structure. We will be researching each of these for specific opportunities for the benefit of Rangeley Capital and then publishing the results first on Sifting the World.

Disclosure: I am/we are long BNCC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.