Weekly Market OverviewStocks began the week much better than expected after markets overseas moved down sharply. Several sectors are still hurting after falling off of all-time highs, including brokerages, transports, energy and some commodities. The biggest shocker, however, continues to be the collapse of the subprime mortgage market and overall real estate weakness. The fall of New Century, HSBC, and other major subprime lenders dragged the market down as several closed-end funds (CEFs) trading mortgage securities also moved further away from net asset value (NAV). Overall, many investors are expecting to see weakness in the market as these economic issues are being sorted out.
Top 10 Stocks to Watch this WeekFundamental AnalysisOur top five stocks to watch for fundamental investors are:
- Cost-U-Less, Inc. (CULS)
- There are two hedge funds currently involved with this stock, both
calling for the company to put itself up for sale. One of the hedge
funds has even said it would make an offer. If the two hedge funds are
successful in lobbying management, the company should sell for at least
$12 per share - a 40% gain. (More CULS articles...)
- PDL BioPharma, Inc. (PDLI)
- Daniel Loeb's Third Point hedge fund contacted this troubled company today offering them help in reorganizing themselves in order to unlock value for shareholders. The company has already been beaten down and targeted by other investors who demanded the company put itself up for sale. As one of their few allies and chances for survival, the company may rely on Daniel Loeb to help turn their company around. And this definitely isn't a bad thing considering his track record! (More PDLI articles...)
- Ceridian Corporation (CEN)
- Bill Ackman propposed that Ceridian spin off its Comdata division
since the two share almost no synergies. Moreover, he said that the
segment was being held back by the parent company. This is another
great spin off opportunity that would help both the parent company and
the child company... and Bill Ackman definitely knows what he is doing!
Meanwhile, those close to the situation say that investment bankers are
trying to find buyers for both businesses - a move which is angering
the two activist hedge funds. (More CEN articles...)
- Applebees International Inc. (APPB)
- The Breeden Partners recently filed a series of Schedule 13Ds
suggesting that the company improve several defficiencies, including
its excessive executive compensation. If these issues are appropriately
addressed, it could help the company save millions and increase their
share price significantly. (More APPB articles...)
- Electro Scientific Industries (ESIO)
- Nierenberg Investment Management first lobbied this company to take
several actions to return shareholder value. Since then, they have been
joined by another hedge fund. Combined, these two should have enough
leverage to at least warrant a response by management. If they are
successful, it could mean special dividends or other measures aimed at
unlocking value. (More ESIO articles...)
Technical AnalysisOur top five stocks to watch for technical analysts are:
- Furniture Brands Intl (FBN) - Diamond bottom, intermediate-term bullish.
- Longs Drug Stores Inc. (LDG) - Continuation diamond, long-term bullish.
- Audible Inc. (ADBL) - Head and shoulders bottom, long-term bullish.
- Transmeridian Exploration Inc. (TMY) - Double bottom, long-term bullish.
- Sepracore Inc. (SEPR) - Head and shoulders top, medium-term bearish.
Stock of the Week : PDL BioPharma, Inc. (PDLI)Daniel Loeb's Third Point disclosed a 7.5% stake in PDLI today and
expressed disappointment and concern over the company's high rate of
spending and significant underperformance. The hedge fund's
Schedule 13D
filing also contained a letter urging the company to cut costs and not
pursue additional acquisitions. Daniel Loeb offered to work with
the company to streamline the company's cost structure and asset base
in an effort to allow the cash generating ability and value of the
company to be developed and made apparent to shareholders. We believe that given Loeb's track record and the mounting concerns shareholders have against management, the odds of a deal between the two are more likely than not. However, this remains to be seen...
Read More on SECInvestor.com…Filing of the Week : NT FormsOccasionally, investors may come across what are sometimes known as NT forms. These are filings explaining why an originally intended filing could not be made on time. The most common NT form is the NT 10-K, which is made in place of an annual report if a company has to restate earnings or re-evaluate their books. These are important for shareholders to look at because they contain all a lot of information regarding the problems that the company is facing and how long they may take to resolve. Often times, the media can overlook problems present in these filings when they report sensational headlines, hence their value to the average shareholder.
You can easily track these SEC filings with e-mail and RSS alerts using
SECFilings.com!
Tip of the Week : All About Spin-Offs
“Sometimes when you mix a fabulous
business with a more mundane one, the market values it as a more
mundane business. And literally just separating the two enables the
market to understand the values.” - Bill Ackman
Many activist shareholders push for spin-offs as a means to unlock
shareholder value. These situations typically arise when the activist
investor believes that one of a company’s business segment could
achieve a higher valuation as an independent company. The primary
targets of such actions are usually conglomorates who own
high-performing business segements that share no synergies with the
rest of the company. For example, maybe a software company wholly owns
a data management company - while the two are related, they may not
share enough synergies to justify ownership.
Activist shareholders like spin-offs because they offer a wide variety of benefits to everyone involved:
- Appropriate Valuation - The spin-off enables the
business segment to achieve an appropriate valuation, which could be
many times higher than their valuation operating under the parent
company.
- Generate Cash - The spin-off provides an
opportunity for the parent company to generate significant cash on the
sale and even unload some of its debt on the new entity.
- Tax Free Distribution - The spin-off enables parent company shareholders to receive “free” shares in the new company in a tax-free distribution.
- Dividends and Buybacks - Many activist
shareholders like to push the parent company to then distribute their
proceeds to shareholders in the form of one-time cash dividends or
share buyback programs.
- Buyout Target - A spin-off reduces a parent
company’s market cap, provides it with large amounts of cash, and helps
get rid of some debt on its balance sheet. Activist investors will
sometimes recommend these transactions to make the parent company a
more attractive buyout target.
And spin-offs can also be an attractive investment opportunity for
another reason too. Typically when spin-offs occur, shares are
distributed automatically to all parent company shareholders -
including mutual funds and other institutional holders. Now, many
mutual funds have to abide by specific investment criteria based on
market cap, revenues, and other metrics. Consequently, some
institutional shareholders may be required to sell their new stock as
soon as the spin-off becomes publicly traded. This windfall of
unjustified selling creates an excellent buying opportunity for the
enterprising investor. In fact, published studies have shown that
spin-offs tend to outperform the overall market by a wide margin during
their first year!
There are several types of spin-offs, including:
- Pure spin-offs are by far the most common in
activist situations. These spin-offs involve the parent company selling
off 100% of their stake in the business segment.
- Carve-outs are instances where the parent company will retain a non-majority portion of the new spin-off.
- Stubs are instances where company’s spin-off a
minority interest in a business segment. Typically this is done to
generate cash without giving up control.
- Tracking stocks are spin-offs that are designed specifically to track the value of their business segments.
All of the information regarding new spin-off issues can be found in
Form 10-12B, which is filed with the Securities and Exchange Commission
(SEC). Proposals to create spin-offs are often found in 8-K filings
(when proposed by the company) or Schedule 13D filings (when proposed
by activist investors). You can track these filings easily with e-mail
and RSS alerts on SECFilings.com.
Final WordsThis
week should be mostly mixed as investors await a clearer sign of
economic direction, particularly after the diseasters overseas and in the subprime mortgage securities markets here. It doesn't look good this week for the larger averages; however, there are certainly plenty of opportunities to profit elsewhere in individual stocks!