Inside Wall Street: Five Potential Takeover Plays for the Second Quarter

Gene Marcial's Inside Wall Street: Five Takeover Plays for Second Quarter Investment guru Mario Gabelli has proved it often enough: With adequate research and experience, one can beat the stock market. And he has the numbers to prove it.

Every quarter since Jan. 31, 2006, Gabelli & Co.'s "Focus Five" team picks five stocks that trade at a relative discount to their intrinsic value and have identifiable near-term catalysts that should make them big winners. And true enough, they were not only big winners but also beat the market.

Since its inception in 2006, Gabelli's Focus Five selections have advanced a whopping 184.47%, outdistancing the paltry 2.18% gain by the Standard & Poor's 500-stock index.

In its most recent quarter (Feb.1 through Apr. 30, 2010), the five stocks Gabelli's team picked all produced handsome gains: Cablevision Systems (CVC) jumped 27.25% during the quarter; Coca-Cola FEMSA (KOF) rose 13.07%; Constellation Brands (STZ) was up 13.62%; MasterCard (MC) inched up 0.74%; and ITT Educational Services (ESI) rose 4.40%. In all, they posted an average gain of 11.52% vs. the S&P 500's 10.51%.

Possible Winners

What are the Focus Five choices for this quarter? They're as diverse as they come, but with one common focus: They're all potential merger-and-acquisition plays. Here are the stocks:
  • HSN (HSNI), the second-largest multichannel commercial network in the U.S., with 2009 sales of $2.8 billion.
  • Mead Johnson Nutrition (MJN), a global leader in pediatric nutritional products with major markets in the U.S. and China.
  • TD Ameritrade (AMTD), a leader in the online brokerage industry, which holds customer assets of about $52.3 billion.
  • TIiVo (TIVO), whose digital video recorder technology allows the playing, rewinding or pausing of TV shows.
  • Weatherford International (WFT), a leading global provider of equipment for oil-and-gas drilling and production.
Daniel Miller, who heads Gabelli's Focus Five investment team says all five stocks are appropriate plays on the "wave of global M&A activity" that's going on and gaining momentum.

HSN is still in the early stages of renewed sales growth, and the company's experienced management team should be able to improve profit margins substantially, says Miller. Investors are now focused on the standstill agreement HSN has with Liberty Media, which owns a 32% stake. The standstill pact expires in August, and Liberty could opt to raise its holdings in HSN. Miller believes a combination of HSN and rival QVC has strategic advantages and, as a result, he notes that HSN, which is now trading at $30 a share, is attractive based on current market dynamics..

Mead Johnson is another takeover target, says Miller, for strategic acquirers that are looking to gain heft in the fast-growing health-food categories. Its stock is currently trading at $50 a share. Mead markets more than 70 products to mothers, health care professionals and retailers in more than 50 countries. Some analysts believe it could be attractive to some of the big food companies that want to expand into health-food products.

TD Ameritrade, now trading at $20 a share, is well positioned to participate in the industry's growth as the stock market continues to advance, says Miller. And it stands out as a potential takeover target in the consolidating brokerage industry, he notes. The company has increased its clients' assets at a 7% annual rate, adds Miller. There's no shortage of financial companies that would find TD Ameritrade an attractive asset.

TiVo's intellectual property makes it a likely takeover target for a variety of potential acquirers, including tech biggies such as Cisco Systems (CSCO), Microsoft (MSFT) and Apple (AAPL), says Miller. TIVo trades at a discount to his 2011 estimated private market value of $22 a share, with the stock currently at $17 a share. In a takeover, TiVo could fetch a higher price.

Weatherford has unique global positions to capitalize on the growing energy exploration and production activities in key markets, such as Russia and Iraq, Miller says. "Its products in the $13 billion directional drilling service business provides growth opportunities that make it an attractive acquisition target for a larger energy oil-and-gas service company," says Miller. Now trading at $17 a share, some analysts place its value at $22 to $25 a share.

With his quarterly Focus Five stock picks, Gabelli gives investors an easy way to do something very difficult: pick stocks that could outrun the market.
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