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, 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 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.

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.

Company

CAPS Rating (out of 5)

Type of Situation

Terms

Pfizer (NYSE: PFE  )

****

Spinoff

Animal health unit

Sears Holdings (Nasdaq: SHLD  )

*

Spinoff

Reducing ownership stake of Sears Canada from 95% to 51%

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

Barking up the right tree?
It's an IPO a year in the making, but drug giant Pfizer announced it's finally decided on spinning off its animal health unit, to be called Zoetis. After mulling which strategic alternative made the most sense, the pharmaceutical ultimately settled on an IPO, though Pfizer will retain control of the division, leading some analysts to question how independent Zoetis will truly be, and how that actually improves Pfizer's position.

Back in 2010, the Fool's Brian Orelli noted Pfizer could benefit from getting smaller, much as Abbott Labs (NYSE: ABT  ) did by moving to split into two companies and Bristol-Myers Squibb (NYSE: BMY  ) did when it shed its baby formula business: "In the bigger picture, Pfizer might be better off selling much of its ancillary businesses, slimming down, and giving its drug discovery business a chance at growing. Diversification can work, but at some point a company becomes worth less than the sum of its parts."

Pfizer's largely followed that advice, divesting its drug dosage formulation outfit Capsugel to Kohlberg Kravis Roberts late last year, and then selling its infant nutrition business to Nestle in April. It's been mulling what to do with animal nutrition since it first announced its plans last July.

Pfizer says the new Zoetis name is supposed to reflect some basis in the words zoology and zoetic, meaning "pertaining to life." Despite sounding like just another horribly named company derived from some focus group session, the division is the largest animal health business in the world with around 9,000 employees and generating $4.2 billion in revenues for the pharma giant in 2011. Even if Pfizer does retain control, it should allow it to focus more on its core drug development business.

With the changes the pharma's been making, the CAPS community has remain supportive of its efforts, with 90% of the nearly 6,100 members rating it believing it will outperform the broad indexes. You can keep an eye on the spinoff's developments by adding Pfizer to your watchlist, then let us know in the comments section below or on the Pfizer CAPS page if retaining control of the animal health business even after the separation is a wise move.

Refined tastes
Is chairman Eddie Lampert really just interested in focusing on Sears Holdings' U.S. retail operations by selling a large portion of its stake in Sears Canada or, as at Credit Suisse's analyst believes, is he really working on liquidating Sears Holding?

Lampert has been chopping up a lot of Sears, to be sure. He spun off Orchard Supply last December, and in February announced plans to spin off its Hometown and Outlet stores in an effort to raise $500 million. While those have been generally successful businesses for Sears, the Canadian division has been a drag, with sales dropping 6% last quarter even as Sears itself returned to profitability.

In contrast, Wal-Mart reported its Canadian stores saw a 3.7% increase in same-store sales while Target (NYSE: TGT  ) ominously announced its intentions to open 135 stores north of the border. Increasing competition from better retailers at the same time Sears Canada is deteriorating probably pushed Lampert's hand.

The Lampert magic at transforming businesses hasn't been evident at Sears since he joined it with Kmart. He neglected spending money on refurbishing his stores in favor of stock buybacks and financial sleight of hand to generate shareholders returns, but sales have instead dwindled, and the value of the stock cratered.

While shares are up 65% from the start of the year, I still don't see those gains holding, just as it's dropped each time it's tried to climb higher. As CAPS member bIlluminati suggests, the current program of selling itself off might not be the best recourse, as "the only way to generate cash is to sell their good locations, of which Sears has too few."

Let us know in the comments section below if you agree, and add Sears Holdings to the Fool's free stock tracking service to see which way it ultimately proceeds.

Checking the mercury
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Fool contributor Rich Duprey owns shares of Pfizer, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Pfizer. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. 

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.


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