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What: Shares of online auction and vehicle marketing service company Copart popped as much as 11% after hedge fund Jana Partners, run by Barry Rosenstein, announced it had purchased shares of the company.
So what: It wasn't so much the purchase of Copart shares by Jana itself that sent shares screaming higher but the reasoning behind the purchase. According to a report from Bloomberg taken from a letter sent by Jana to shareholders, Jana sees considerable value to be unlocked if Copart were to convert to a real estate investment trust. The letter also notes that much of Copart's earnings could be classified as qualifying real estate income if it made the switch.
Now what: Jana's position is clearly exciting investors, as REITs are required to pay back at least 90% of their profits to shareholders in the form of a dividend in return for favorable tax status. Based on Copart's projected 2013 EPS, a REIT conversion would give the company a yield of 4% or possibly even higher. Although the idea sounds great on paper, it can take years to get approved for the conversion, and right now this is mere speculation on Jana's part. With auto sales slowing and Copart now at 20 times forward earnings, I'd personally consider driving off the lot.
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The article Why Copart Shares Burned Rubber originally appeared on Fool.com.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Copart. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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