Eighteen
Telltale Signs
of a Stock Poised to
Potentially Double In Price
Charles LaLoggia and Cherrie Mahon, co-authors of The Superstock Investor, McGraw-Hill, U.S.$27.95, 301 pgs., give investors advice on how to become a become a "superstock browser" and how to profit from Wall Street's best undervalued companies. The authors reveal eighteen telltale signs of a stock that is poised to shoot up not "over the years" but practically overnight.
Create Your Own "Research Universe"
Your
goal as you begin your new career as a "superstock browser"
will be to create your own "research universe." Every
Wall Street analyst has a "research universe" that
consists of a group of stocks the analyst follows on a regular
basis. Most of the time, these stocks are organized by industry
group. A chemical stock analyst, for example, will follow a universe
of chemical companies and select one or several as his or her
top pick.
As a superstock browser,
your goal will be to create your own research universe, a list
of potential "superstock" takeover candidates that
possess one or more of the characteristics addressed below. You'll
be looking for some of the Telltale Signs that suggest that a
sleepy, out-of-favor, and out-of-the-way stock might be about
to emerge as a takeover target.
One advantage you will
have over the average Wall Street analyst is that your "research
universe" will not be confined to a certain industry group.
Instead, once you learn to spot specific characteristics of potential
takeover targets, you'll find yourself following a diverse group
of stocks that span a wide variety of industry groups. And once
you've constructed your "research universe," you should
look at it as a potential shopping list of investment possibilities.
For example, if you
are a conservative investor, you may find that a water or natural
gas utility or a supermarket company appears on your list of
takeover candidates. Or, if you happen to believe that energy
prices are headed higher, you may notice that an oil and gas
exploration company is on your shopping list. Or, if you believe
energy prices are headed lower, you might note that a trucking
company or an airline, or some other company which could benefit
from lower energy costs, is on the list.
In other words, once
you get the hang of browsing for takeover candidates, you will
be able to find stocks that fit almost any investment goal or
philosophy. But these stocks will have the added attraction of
being genuine takeover possibilities, which means they'll have
the potential of rising suddenly and substantially in price,
no matter what the stock market is doing.
And here's the best
part: This "icing on the cake" comes free of charge.
If you do your homework properly and focus on stocks not widely
followed, and therefore undervalued by Wall Street, you will
be able to buy stocks that carry this highly charged takeover
potential with no takeover premium built into the stock price.
In other words, to the outside world these stocks will look
like boring, mild-mannered Clark Kents but in reality, each will
have the potential of slipping into a phone booth at a moment's
notice and emerging as a superstock.
What You'll Be Looking For
I suggest that you read, copy, and post the following list of Telltale Signs that a neglected stock has the potential to become a superstock takeover candidate. You should study this list until it becomes second nature to you because these are the things you'll be looking for as a superstock browser.
Eighteen Telltale Signs
1.
An outside company or individual ("beneficial owner")
accumulates more than 5 percent of a company's stock and then
files a Form 13-D with the Securities and Exchange Commission.
2. A company
that already has one outside "beneficial" owner attracts
a second or even a third outside investor who accumulates a position
of 5 percent or more.
3. An outside
beneficial owner, in its Form 13-D filing, says that it is seeking
ways to "enhance shareholder value," maximize shareholder
value," or speak to management or other shareholders about
"exploring strategic alternatives" all code phrases
for potentially putting a company up for sale to get the stock
price higher.
4. An outside
"beneficial" owner pays substantially more than the
current market price of the stock in a private transaction with
the company to establish an initial position or increase its
stake, or agrees to provide services or something else of value
to a company in exchange for an option to purchase shares where
the option's exercise price is substantially higher than the
current market price of the stock. This is often a strong indication
that all parties involved see substantially higher values ahead
for the company and its stock.
5. An outside
beneficial owner adds to its stake in a company through additional
open market purchases of its stock.
6. An outside
beneficial owner expresses an interest in selling its stake
in a company and says it will review strategic alternatives
often a code phrase for a desire to have the target company
acquired by a third party to maximize the value of the beneficial
owner's investment.
7. A dispute
between an outside beneficial owner and the company in which
it owns a stake breaks out into the open often a signal that
a battle for control of the company will take place or that the
outside beneficial owner will find a third party to buy its stake
as a prelude to a takeover bid.
8. A company
in which an outside beneficial owner holds a stake or is accumulating
additional shares and/or which operates in an industry where
takeovers are proliferating announces a stock buyback program.
9. A company
in which an outside beneficial owner holds a stake or is adding
to its stake is the subject of insider buying by its own officers
and/or directors.
10. A company
with an outside beneficial owner and/or operates in an industry
where takeovers are proliferating announces a "shareholder
rights plan" designed to make a hostile takeover more difficult.
11. A company
in a consolidating industry sells or spins off "noncore"
assets or operations, thereby turning itself into a "pure
play", which is often a signal that the company is preparing
to sell itself to a larger company within its core industry.
12. A company
in a consolidating industry takes a large "restructuring"
charge, in effect putting past mistakes behind it and clearing
the decks for future positive earnings reports. Such action can
be important to a potential acquirer and is often a sign that
a company is preparing to sell itself.
13. A company
in a consolidating industry announces a restructuring charge
that causes the stock to decline sharply and becomes the subject
of significant insider buying and/or announces a stock buyback.
This is usually a sign that the stock market is taking a shortsighted,
far too negative view of what may actually be an early clue that
a takeover is on the horizon.
14. A company
in a consolidating industry is partially owned by a "financially
oriented" company or investor, such as a brokerage firm
or buyout firm, that has a tendency to buy and sell assets and
that would be ready, willing, and able to craft a profitable
"exit strategy" for itself by engineering a takeover
of the company in question, should the opportunity present itself.
15. The founder
of a company who owns a major block of stock (10 percent or more)
passes away. This type of situation often leads to a desire by
the estate to eventually maximize the value of the stock in other
words, a desire to have the company acquired.
16. Two or more
bidders try to acquire a company in a certain industry, resulting
in a bidding war. Since only one of these bidders can be a winner
of the target company, there is a good chance that the losing
bidder will look elsewhere for another acquisition target within
the industry. In a case like this, you should browse through
other companies within the industry looking for one or more of
the Telltale Signs on the list.
17. A small-to-medium-size
company in a consolidating industry achieves a breakout from
a "superstock breakout pattern"; i.e., the stock penetrates
a well-defined resistance level at least 12 months in duration
following a series of progressively rising bottoms or support
levels, which indicates that buyers are willing to pay increasingly
higher prices to establish a position. This pattern creates the
appearance of a "rising triangle" on the chart. The
best superstock breakout patterns occur when volatility decreases
markedly in the weeks or days prior to the breakout.
18. A company
that owns a piece of another company is itself acquired. Many
times it can pay dividends to look into a situation where a stake
in one company is "inherited" through a takeover of
another company. Many times, if Company A acquires Company B,
which, in turn, owns a stake in Company C, you will find that
Company C becomes a takeover target in one of two ways: (1) Company
A may eventually bid for the rest of Company C if this fits its
overall business/acquisition strategy or (2) Company A may sell
off the inherited stake in Company C to a third party, which
then bids for the rest of Company C. A takeover of a company
whose stock is "inherited" through another takeover
becomes even more likely when there is already a business relationship
between Company A and Company C.
For illustrative purposes,
let's look at an actual example of Telltale Sign number 18. In
June 1999, Weyerhauser, the largest lumber producer in the United
States, purchased Canadian timber company MacMillan Bloedel Ltd.
As part of that takeover, Weyerhauser "inherited" a
49 percent stake in Trus Joist, a Boise, Idaho, manufacturer
of lumber products, which was partially owned by MacMillan. The
other 51 percent of Trus Joist was owned by TJ International,
a publicly traded company listed on Nasdaq.
There was some speculation
at the time of the Weyerhauser purchase of MacMillan Bloedel
as to what would happen to Trus Joist. Most observers seemed
to believe that TJ International would buy out the 49 percent
of Trus Joist that had been inherited by Weyerhauser. Others
seemed to feel that Weyerhauser might make a takeover bid for
TJ International as a way to buy the remaining 51 percent of
Trus Joist.
At first TJ International
stock rocketed from the low $20s to as high as $33-7/8, based
on the second scenario: a potential takeover bid from Weyerhauser.
But TJ shares then fell back sharply, falling as low as $21-3/8,
based on the emerging consensus that TJ would probably buy out
the 49 percent Trus Joist stake from Weyerhauser.
A superstock observer
who noted that Weyerhauser was the major distributor for Trus
Joist's products and supplied most of the raw materials for Trus
Joist could have concluded that it was highly likely that Weyerhauser,
which was already in acquisition mode, would want to own
the rest of Trus Joist rather than sell its 49 percent to TJ
International.
On November 23, 1999,
just 5 months after it bought MacMillan Bloedel, Weyerhauser
agreed to buy TJ International for $42 per share. TJ International
jumped $9-3/8 (or 22 percent) in one day as a result of the bid,
which was nearly 100 percent premium to TJ's stock price just
4 months before.
Other Things To Look For
In
addition to these telltale signs that a formerly sleepy overlooked
stock is about to become a superstock takeover candidate, you
should also pay close attention to any and all merger announcements
each and every day, making note of which industries are experiencing
consolidation and what the reasoning behind that consolidation
may be. You should also read and listen to any interviews of
CEOs of companies that are making acquisitions for clues about
what their future acquisition plans may be. You will be amazed
at how much information you can obtain and how many tantalizing
clues are available by simply listening carefully to companies
that are actively acquiring other companies.
Editor's Note: ©
2001, reprinted with permission, McGraw-Hill. Charles LaLoggia,
publisher and Cherrie Mahon Director of Research for the monthly
Superstock Investor newsletter have co-authored, The Superstock
Investor: Profiting From Wall Street's Best Undervalued Companies,
(McGraw-Hill 301 pgs. $27.95). Written in plainspoken language,
this book describes an approach to picking stocks that could
jump instantly in price because they have become takeover targets.
The book describes a method of reading the financial news that
LaLoggia has learned to use over his 26 years of publishing the
newsletter. Advice and guidelines in The Superstock Investor
will dramatically increase your chances of finding undiscovered
superstocks on the verge of breaking out and climbing on board
to consistently lock in market-beating returns. The Superstock
Investor is available in bookstores and on BarnesandNoble.com,
Amazon.com, and Borders.com.
