Can You 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; Greenblatt achieved 50% annualized returns for a decade investing in them.
We'll look at some announcements presenting an opportunity for profit and pair that 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.
However, not every deal is worth your money. It takes some 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
|A123 Systems (NAS: AONE)||**||Buyout||Pursuing "strategic alternatives"|
|Marathon Petroleum (NYS: MPC)||*****||Spinoff||IPO of midstream assets|
Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.
Lithium-ion battery maker A123 Systems realizes the gig is finally up, and despite getting hundreds of millions of dollars in government grants, it may yet go the way of Solyndra, Ener1, Beacon Power, Evergreen Solar, and other "green tech" companies that got a helping hand from the U.S. taxpayer.
Earlier this month, A123 reported first-quarter results showing revenue plummeting 40% following an expensive battery recall that left it bleeding, as most of this year's production will have to go toward replacing its defective product. Its losses ballooned to $125 million, of which almost $69 million was due to the recall. Its survival -- like those that have gone before it -- is now in doubt, and it's scrambling to get financing at the same time it wants to pursue "strategic alternatives."
This comes after A123 had just awarded big "retention bonuses" back in February to its CFO and several VPs. No doubt they saw the writing on the wall and wanted to jump ship, so they needed encouragement to stay on. The quarterly report also revealed that it additionally signed contracts with 40 employees to give them severance payments ranging from six months to two years if the company is bought out. While all options are on the table, this suggests they're really shopping the company.
I've been expecting A123 to go belly up for some time now, and while much of the commentary in response to my call has been on the emotional side, CAPS member capitalgorilla might just be right that it will get bailed out by General Motors, General Electric (NYS: GE) , or BMW: "Still someone may buy them but I doubt investments will be eliminated as their technology is too good, too valuable for GM, GE, BAE and BMW and more to evaporate."
Certainly the first two have been tightly tied to pushing the green-energy agenda, and both might even benefit from making the acquisition -- the former as a customer and the latter as a purveyor of green technology itself.
I think the financing situation is dicey, however, and no one may want to step into that abyss, so I'll be maintaining my underperform rating on CAPS. You can keep an eye on the development of any deal by adding A123 to your watchlist. Let us know in the comments section below or on the A123 Systems CAPS page if you think we'll see a white knight ride to the rescue.
Apparently spin-offs can be addictive. Marathon Petroleum, itself a spinoff from Marathon Oil just last June, announced that amid various strategic alternative considerations, it was further looking into the possibility of spinning off some of its midstream assets in an IPO -- most notably its pipeline segment that's bundled into a master limited partnership.
While the refiner reported strong profits based on wider refining margins -- margins rose to $8.36 per barrel from $6.73 last year -- the pipeline transportation portion of the business witnessed an 18% decline in profitability.
Pipelines seem to be popular assets these days. EXCO Resources (NYS: XCO) recently announced it was looking to raise $400 million by selling its stake in a pipeline project to help pay down its burdensome debt load, while Energy Transfer Partners (NYS: ETP) is buying Sunoco to get at its east-coast pipeline network.
CAPS member cardiaccards likes where Marathon is currently positioned in the industry and would undoubtedly find an IPO of its pipeline assets even more appealing: "I don't think the values of this new capacity and ability to process heavy Canadian Oil are priced in."
Let us know in the comments section below if you agree, and add Marathon Petroleum to the Fool's free stock-tracking service to see which direction it goes.
Checking the mercury
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At the time this article was published Fool contributorRich Dupreyowns shares of General Electric, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of General Motors. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.