When the Market is Actually Wrong.

Recapping two trades which I max staked (20% sizing each).

The reason I haven’t posted much is because I decided to refrain from writing further until I was confident that I actually have figured out real edges in the market. Now, I can confidently say I have.

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“Ticker XYZ is cheap because its got some cash and is 7x FCF so initiate 5% position” simply does not cut it for me. So many articles like that are written everyday on this platform. When you have a lot more capital to invest I can get behind spreading your positions among multiple names with 1-3% position sizes. But, for the majority of people I believe this is edge erosion. Not because it’s impossible to win investing that way (though it is extremely hard), but because of the opportunity cost. You’ll see what I mean. Here is two trade recaps in which I decided to max stake (20%) recently:

Global Uranium and Enrichment Limited (GUE.ax): Cross exchange merger arb

MC: $36 million

Initiated: 23/12/25

Completion: 16/02/2026 (2 months)

Net return: 34%

GUE announces a merger with NASDAQ: LITM. Stock doesn’t move. Ummm ok.

Is this a real bid, what’s going on?

Well both companies share a director.

Is there a economic rationale for the merger?

Yes. Looking at their asset bases LITM probably benefits more but I knew that ASX retail always think the US has more opportunity especially to do with raising capital. Check HotCopper (Aussie punting investing forum). Retail are very vocal, but they agree with both points, they think its a good deal because there will be more opportunity for larger cheaper capital though LITM does benefit a tad more.

Ok so lets re check the price, the bid came at a 60% premium to last close so price is probably at least 20-30% more expensive.

Andddd it’s traded down.

Rightttt.

Is this a sham bid?

Let me read the scheme docs. Okay this is set out very confusingly, it’s 600 pages long. After scratching my head for 2 hours I see that its a full scrip exchange with a limit to how dilutive LITM can get (LITM would have to go down something like 80% for this to hit) and a maximum consideration in terms of an AUD amount in relation to GUE. It basically said that shareholders will receive $0.0968 per GUE share in LITM equity but the amount of shares issued will be determined by the 10 day VWAP prior to the scheme meeting. This type of consideration is quite rare and the first i’ve seen.

So the stock trades down from 64c to 60-62c vs the 96.8c offer. Just your usual no move on an announcement of a 60% takeover premium completing within 2-3 months (as set out in the timetable they provided). At the time I was so confused by this set up I simply thought I must of missed something major. Just like the classic poker maxim, “If you don’t know who the fish is, you’re the fish”, I thought I’m better off just steering clear. The price is either so wildly wrong or I am the fish at the table (on brand). I thought I’m better off just steering clear for now.

Market is probably right, right?

I come back a few days later and the price is up slightly, around 66c. Ok maybe this could be something that is the start of something else which is the start of something big!

I re-read the scheme docs and make sure I completely understand the spread and how I would put the trade on. This spread is big enough to go unhedged I think to myself. I took a look at LITM’s volatility and it does gap up or down 10% overnight sometimes (it’s not illiquid, it’s just a uranium mining company). Earning the spread is the most important thing if the acquirer has volatile equity so the right move is to hedge. I have to wait until scheme meeting to determine the amount of shares needed to hedge but I know by then the price will have moved. It does start to move. So I get my full position in at 68c (this was after merger conditions like FIRB approval were already approved, insane) which is about 10% above last close before merger announcement. Amazing break price. -10% on fail, 50% on success.

Scheme meeting comes around 1 month later. At this point I was floating to others the idea of going much bigger then I already was, i’m already at a 20% position... The vote is basically guaranteed to pass with inside ownership and good retail feedback.

Scheme is passed with 99% votes for.

Great, now the exchange ratio is determined and people know exactly what they are getting for their GUE shares. Time to check the share price.

The share price has again decreased.

Yes, price decreased slightly after all merger conditions were satisfied and the vote passed, standing at a 28% spread with no conditions left. Average trading volume was ~$400k/day and this went on for 1 month.

THE CONSIDERATION GETS PAID IN 3 WEEKS AND THE SPREAD IS 28%.

I had already checked the borrow on IB, 4mil+ USD available and 8 separate lenders. Recall chance is minimal, borrow rate is 16% but I am holding this hedge for just 3 weeks, borrow fee is a rounding error. I take the hedge position. Now because of unlucky overnight move we end up locking in around 34% net for a holding time of 2 months. Taking the position when there was such a large margin of error and the odds heavily in our favour meant I was able to be safe from any unluckiness in an overnight move in LITM price when going to hedge (you are exposed to this as GUE is listed on ASX and LITM the NASDAQ, so opposite trading times).

I think we saw those unusual price moves initially because Aussies didn’t want to hold a US listed stock. Looking at the forums, it looks like some of their brokers don’t even allow US trading. This combined with everyone else not knowing that their CommSec account actually can trade US shares probably meant that there was price insensitive selling.

What i’m trying to show you is that there is specific times at specific prices which there is indeed an edge, even if you are just estimating things in ranges it is quite easy to see when the price is wrong. But this simply does not exist in mid or large cap land. There was plenty liquidity available and I believe a few special sit funds did play in this one too.

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Next Sciences (NXS.ax): Return of capital stub

MC: $42 million

Initiated: 8/12/2025

Closed: 31/12/2025 (3 weeks)

Net return: 3% (+ free rolling liquidation proceeds, likely 5%+)

Classic return of capital play with a remaining stub. We are able to get our entire stake back at to us at no cost, and instead a small profit of ~3% if you could get set at 14c a share. I got filled for 14c. 14.5c was set to be returned in December, the Co delists. We have a leftover business (not worth a tonne), some cash to pay the liquidator and some extra cash to cover any possible contingency liabilities. At this point, I could care less about what the leftover business is worth. I’m going to get my capital back in a month ish and make 3% while doing so. Although, I expect the liquidation to be worth another 5% ish (had more specific calcs which i’ve lost somewhere). IRR is 30%+ off the rip even without the liquidation proceeds (which we now have a complete free roll in). These capital return situations are insanely high IRR’s and allow you to stake up exponentially at certain prices (as you get your stake in dollars returned to you but keep the same number of shares), you only miss out on the time value/opportunity cost of capital. More on these situations in the next article.

Position size

The reason both positions were staked at 20% is due to the nature of compounding at a high edge and it’s result on your equity curve. The absolute highest ROI is always when you can get a lot of capital into a position where you have a high edge and when that idea will play out as quick as possible. Very intuitive but this has massive mathematical ramifications in your sequence of investing outcomes - outcomes which are completely unknown until after the fact. Considering the IRR’s here were off the chart (much > 30%), heavily mispriced and both situations were ending in 1-2 months these are the needed conditions for a max stake. Downside plays a major role in the current price and must incorporated so you know what kind of deal you are getting. That’s why I handicap my IRR’s by an up and down probability, check how sensitive it is to changes in those numbers and I end up with a probability weighted IRR figure, which simply represents the mathematical expected value in IRR terms. A probability adjusted IRR has to be >30% for me to consider the position. This ends up with me obtaining a book of bets - much more similar to multiple poker hands then investing - where the odds are massively in my favour. The net result over many hands should be an equity curve up and to the right.

Going forward, my aim is to get these articles out before the situations unfold so everybody can participate if they choose.

Stay tuned as I’m going to be writing about my journey in making these kinds of bets with the aim to make an average 30% IRR on invested capital.

Will be uploading twice a week for the rest of the year :)

NFA, DYOR.