This article is part of our Rising Star Portfolios Series.
The field of special situations can be a happy hunting ground. As Joel Greenblatt details in his book You Can Be a Stock Market Genius, special-situation investing led him to 50% annualized returns for a decade. That type of return transforms each $1 invested into $52 in just 10 years.
Such special situations are created by transactions that transform the business -- spinoffs, reorganizations, and recapitalizations, to name a few. But financial statements don't often reflect the value created by such transactions. Thus, agile investors can get a jump, and a good price, on these stocks before they appreciate to full value. And while these situations can be complicated, this transactional complexity often creates value of its own.
The following recent or pending spinoffs could make attractive investment candidates:
Loral Space & Communications
||Space Systems/Loral unit||Unclear|
||Onshore drilling and manufacturing businesses||Unclear|
||Lone Pine||First half of 2011|
Loral's course of action with regard to its Space Systems/Loral unit (SS/L) depends in part on the actions of Telesat, a satellite fleet operator of which Loral owns 64%. If Telesat pursued a stock offering or strategic acquisition, Loral would likely spin off or sell the SS/L unit. Loral has been trying to IPO a 19.9% stake in the SS/L unit, with no success.
Drilling contractor Rowan is looking at ways to maximize shareholder value. That includes potentially spinning off its onshore drilling operation, as well as its manufacturing business. Analysts think Rowan needs this move to attract buyers for its remaining offshore operations business. The company owns about half of the world's top rigs, and its rigs are substantially newer than the industry average.
Forest Oil will spin off Lone Pine, but only after crafting an IPO for it. Lone Pine would issue as much as 19.9% of its stock, in exchange for as much as $375 million. Forest Oil would then distribute the remaining Lone Pine shares to its investors about four months after the IPO. Lone Pine will own all of Forest Oil's assets in Canada.
I'll be tracking these transactions as part of my portfolio. Are there other special situations that look interesting to you? Let me know in the comments box below.