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 a $1 investment 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. In my Special Situations portfolio, I'm focused on just such opportunities. Below are three plays that I'm watching for my portfolio.
About six months ago, Frontier purchased a huge chunk of Verizon's wireline operations, which has boosted revenue and cash flow. While Frontier and competitors CenturyLink
These companies should be valued on their dividends. Frontier now offers an 8% yield, compared to Windstream's 7.4% and CenturyLink's 6.5%. If those yields change as investors' risk appetite is whetted, we could see a convergence of Frontier and CenturyLink. And if Frontier realizes the cost synergies it's promised, then even better. That could increase the company's ability to return the dividend back to its $1-per-share level, which would certainly give the stock a kick. Plus, there's the possibility of consolidation in this industry, which could push prices higher.
Just this week, Marathon announced it would spin off its refining business, which will be called Marathon Petroleum. Marathon Petroleum would be the fifth-largest U.S. refiner and would have a portfolio of assets focused mainly on the Midwest, Gulf Coast, and Southeast of the U.S.
Meanwhile, the parent company will remain focused on exploration and production. So the company's fortunes will be more closely tied to the price of oil. If you think oil prices have room to run as the global economy heats up and the dollar weakens, then Marathon Oil might be a great opportunity as it sheds the downstream business, which is generally a less attractive business.
Late last month, DryShips announced that it was acquiring $770 million in new tankers. The tankers will become part of a spinoff or an IPO sometime in 2011, according to the company.
Said Chairman and CEO George Economou: "We are positioning the Company to be a significant player in the tanker market with a sizable fleet and a balance sheet that can withstand the cyclicality of the tanker market."
Apparently, spinoffs among the shippers are hot. DryShips peer Diana Shipping
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Jim Royal, Ph.D., owns shares of Frontier. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.