Profit From These Special Situations

In his book You Can Be a Stock Market Genius, author and investor Joel Greenblatt highlighted the opportunity hidden in mergers and acquisitions, spinoffs, and restructurings. Some deals are so complex that the true value of a stock won't be unlocked until well after the fact, giving savvy investors a chance to get in early and grab hold of shares at a discount. Huge profits are possible, and he achieved 50% annualized returns for a decade investing in them.

We'll look at some announcements presenting an opportunity for profit and pair those with the views of the 180,000 members of Motley Fool CAPS to see what they think of the businesses involved. If the best and brightest in the investment community like these stocks, it may be worth your time to dive in further.

But not every deal is worth your money. It takes diving into the filings to understand the nuances, so don't use the stocks below as a buy list -- more due diligence is needed on your part.


CAPS Rating (out of 5)

Type of Situation


Kraft (NYS: KFT)



North American grocery business, 100% tax-free to KFT shareholders

Ralcorp (NYS: RAH)



Post Holdings, 1 share for every 2 Ralcorp shares owned

Source: Yahoo! Finance.

Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.

Isn't that special?
There's still plenty of time for investors to delve into Kraft's spin-off of its North American grocery business, which it plans to complete by the end of the year. Details for the separation agreement still need to be hammered out, but Kraft will become a $32 billion snacks business, and the newly created company will be a $16 billion operation consisting of the current U.S. beverages, cheese, convenience meals, and grocery lines, which includes brands like Maxwell House coffee, Philadelphia cream cheese, and Jell-O. The snack maker will be left with its own top-tier brands such as Oreo cookies, Planters nuts, and perennial favorite Swedish Fish.

As investors are aware, Kraft itself was the product of a spin-off from cigarette maker Altria a few years ago. Interestingly, Kraft was the company that sold Ralcorp the Post cereals brand that Ralcorp will be spinning off.

By making itself a more focused operation, Kraft should be better able to target expanding markets in emerging parts of the globe. The recent large layoffs it announced helps position it for that effort. But it will be going head-to-head now with PepsiCo (NYS: PEP) , the world's largest snack maker, which has nearly 16% of the market. It's also giving up a very lucrative business: While the combined grocery parts generated a quarter of Kraft's revenues, they were responsible for 40% of its operating profits. The spun-off grocery business could be the one to watch.

Highly rated CAPS All-Star joryko believes Kraft will underwhelm the market over the near term as it retrenches.

Looking for Kraft to level off in the short term. While it is a financially great company, it has been on quite a run since the recession and is close to becoming overvalued, if it isn't already.

Let us know in the comments section below or on the Kraft CAPS page if the math makes sense to you, then add it to your watchlist to be notified of terms and details as they're announced.

Breakfast of champions?
The anticipated spin-off of Post Holdings should be completed by the end of the month. As noted above, Ralcorp bought the brands from Kraft in 2008 in a $1.7 billion deal that was supposed to be a seminal event for the private label products company. It would give it a portfolio of brand name cereals like Shredded Wheat and Raisin Bran that would supplement all the store-brand products it was making for customers like Wal-Mart, which accounted for 18% of its revenues in 2011.

Yet the synergies never really materialized. While the private-label goods did well during the recession, growing from $2.8 billion in 2009 to $3.8 billion over the last 12 months ending in September, the branded division saw revenues fall from almost $1.1 billion to $954 million over the same time frame.

The spin-off will face some rough going that won't lend itself to any quick, snap-crackle-pop profitable growth. The Fool's retail analyst Austin Smith wonders how the new Post Holdings will be able to survive against competitorsKellogg (NYS: K) and General Mills (NYS: GIS) . Both of those companies had to make adjustments to deal with the high prices of grains and other key ingredients for their products, and Post will face the same challenges.

That could leave Ralcorp, however, in a better position than it was, and I'll be maintaining my outperform rating on CAPS for the private-label food maker. All 10 analysts rating it agree, but add the stock to the Fool's free portfolio tracker to keep track of how it performs when the two businesses go their own way later this month.

Checking the mercury
Digging into these deals is exactly what the analysts at Motley Fool Special Ops do every day, finding the best situations to invest in. It's a special opportunity worth taking a 30-day risk-free trial in.

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At the time thisarticle was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Wal-Mart, PepsiCo, and Altria. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in PepsiCo and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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