With March Madness just around the corner, it's time to start thinking about filling out your brackets. And if you don't already, you'd better assign some extra points to some down-and-out teams like Michigan State, West Virginia, and Syracuse. You see, when the Big Dance comes around, the coaches of these teams (Tom Izzo, Bob Huggins, and Jim Boeheim, respectively) seem to be good for at least a win or two regardless of the talent of the team.

And so it is with investing. "Jockey plays" are situations where investors become shareholders simply because a manager or activist investor can take a seemingly average business and eke just a little more -- and in some cases, a whole lot more. While successful jockey plays can be tough to sniff out, the rewards can be as sweet as cutting down the nets.

Before I get to a jockey play in its early days, here are some examples of jockey plays that have had varying degrees of success.

The best known jockey in the world
Warren Buffett is the world's most famous jockey. Sure, insurance is a good business: Policyholders pay you today in exchange for covering a risk that may never happen. And those funds collected today can be invested and grow to more than cover eventual claims. While that sounds easy, many insurance companies are just plain average; they either don't assess risk well or don't invest their collected premiums very successfully.

The insurance companies owned by Buffett's company, Berkshire Hathaway (NYSE: BRK-B), bring him a ton of money to invest, and he's perhaps the world's greatest investor. As a jockey, Buffett staffed his insurance companies with prudent risk takers -- Tony Nicely (CEO of Geico) and Ajit Jain (head of reinsurance) -- so he could focus on investing in high-return, moat-laden businesses such as See's Candy and Flight Safety International. Over almost any reasonable time frame, hitching your wallet to the Buffett horse has paid off handsomely.

Some cash flow to go what that shake?
 Motley Fool Special Ops tagged Biglari Holdings (NYSE: BH) as an attractive jockey play with a bright and long future back in March 2010. Wunderkind and activist investor Sardar Biglari took control of ailing restaurant chain Stake n Shake back in 2008 and immediately turned things around. By focusing on operations and stunting growth, Biglari used the cash from all those milkshakes to pay off debt and build an impressive bank account that he plans to invest in other activist situations.

 

Metric

Quarter Before Biglari

(Q3 2008)

Today

(Q1 2011)

Long-term debt

$16.5

$17.7

Cash and investments

$1.6

$86.9

YoY revenue growth

(6.5)%

5.7%

Sources: Capital IQ, a division of Standard & Poor's, and company filings. Dollar figures in millions.

Shares have risen 37% since Special Ops recommended Biglari Holdings, and the team thinks shares could have up to an additional 40% upside. While this jockey play is still in its infancy, many investors fear that Biglari is out for his own interests and won't share the bounty with shareholders.

Trimming the fat
Hedge fund manager Eddie Lampert began buying the debt of bankrupt retailer Kmart back in 2003. He then helped negotiate the merger of Kmart with Sears, forming the entity he now controls called Sears Holdings (Nasdaq: SHLD). Lampert has closed numerous underperforming stores, infused stores with life and reinvigorated brands, touted productivity and efficiency, and beefed up online sales.

Things were going great until the recession in 2007 and 2008 crushed Lampert's retail turnaround. Operating margins are now below where they were at the end of 2004, and customers aren't swooning for the company's merchandise. Investors who bought Sears shares any time between 2005 and 2007 have lost money trying to ride Lampert's coattails.

A horse you can ride now to make more than just pennies
Last August and September, activist investor Bill Ackman began building a hefty stake in mall retailer J.C. Penney (NYSE: JCP). While some think Ackman may be looking to monetize J.C. Penney's real estate, he has hinted that his interest is more about turning around the retail operations, much like Eddie Lampert is trying to do at Sears. Ackman has joined the board at J.C. Penney and likely has a plan to return the retailer to its glory days of old.

J.C. Penney will provide a tough test for Ackman in the coming years. The company has significant debt and hasn't increased its annual sales since 2007. Retail competition is intense, too. Even though Ackman's prior activist bout with a retailer -- Target (NYSE: TGT) -- didn't go as planned, he believes achieving operational improvement at Penney's will come much easier because it hasn't been as well-run historically. But with American consumers beginning to spend again, Ackman might just have a tailwind this time around instead.

If this jockey's activist touch can bring sales per square foot and margins back to more respectable levels, investors could win big time.

The bottom line
Filling out your tournament brackets is tough work, and betting on a jockey doesn't lead to an automatic victory. Investors have had varying degrees of success, but for those able to discern winning jockey plays, the payoffs can be spectacular.

If you'd like help assessing jockey plays and other special situations and find out more about Motley Fool Special Ops, check out some of the ideas of jockey play expert Tom Jacobs and his team have unearthed by dropping your email address in the box below.