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 (Nasdaq: AONE  ) ** Buyout Pursuing "strategic alternatives"
Marathon Petroleum (NYSE: 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 (NYSE: 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.

Refined tastes
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 (NYSE: 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 (NYSE: 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
If you like energy stocks, The Motley Fool has found one idea that could meet all your needs. Read about the "Only Energy Stock You'll Ever Need" right here in The Motley Fool's special free report on the energy industry and its best prospect. It's free for a limited time, so click here now.

Fool contributor Rich Duprey owns shares of General Electric, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of General Motors. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1895588, ~/Articles/ArticleHandler.aspx, 10/23/2016 12:49:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
AONEQ.DL $0.00 Down +0.00 +0.00%
A123 Systems CAPS Rating: **
ETP $37.01 Up +0.56 +1.54%
Energy Transfer Pa… CAPS Rating: ***
GE $28.98 Down -0.09 -0.31%
General Electric CAPS Rating: ****
MPC $44.09 Up +1.04 +2.42%
Marathon Petroleum CAPS Rating: ****
XCO $1.17 Down -0.06 -4.88%
EXCO Resources CAPS Rating: **