Shares of Gateway (NYSE:GTW) soared higher on Monday after it was revealed that a firm was snapping up a 10% stake in the cow-patched computer maker and hiring an activist investing firm to drum up ways to improve Gateway's prospects. The stock has since continued to appreciate on firming of buyout speculation.
If you haven't checked up on Gateway lately, let me be the first to warn you that the company has struggled since its eMachines purchase. These days, Gateway shares trade for a buck or two and change. A couple of years ago, Gateway had enough cash on its balance sheet to buy itself out at today's price twice over. Unfortunately, it's peddling a product that is out of favor until Microsoft's (NASDAQ:MSFT) Windows Vista comes out, and larger rivals are hitting the entry-level stronghold hard with cheap systems.
A week ago, billionaire investor Carl Icahn filed a report indicating that he had recently scooped up a piece of Take-Two Interactive (NASDAQ:TTWO). A few years ago, the software developer was raking in the Benjamins with its Grand Theft Auto franchise. These days? Shareholders are the ones who are feeling robbed, as the video game specialist has struggled with its books and die-hard gamer apathy during the wait for next-generation consoles to roll out later this year.
Gateway? Take-Two? Are you kidding me? Even their mothers are disowning them, yet you have seasoned investors gobbling them up and asking for seconds. As the tagline for NBC's new Ugly Betty sitcom goes, "Ugly is the new beautiful."
Ugly is the new beautiful
There's nothing wrong with boring stocks. Some of the biggest gainers coming out of the Motley Fool newsletters make plain vanilla yogurt appear chancy. One of Philip Durell's biggest winners over at Motley Fool Inside Value is an accounting software company. Over at Motley Fool Hidden Gems, a pizza oven maker has baked enough dough to become a refreshing 4-bagger since Tom Gardner's initial recommendation nearly three years ago. Intuit (NASDAQ:INTU) and Middleby (NASDAQ:MIDD), respectively, may not seem like sleepy names now that their stocks have rattled off scintillating gains, but trust me, you'd have been yawning through their mission statements a few years ago.
Working in favor of Gateway and Take-Two is that we don't really need to guess on the catalysts needed to awaken interest in these companies. By early next year, folks will be upgrading their computers as a way to get Vista preinstalled and to harness its new features. With talk of computer manufacturers using upgrade vouchers to keep holiday business brisk and giving customers the chance to trade up to a new system early, a rebound at Gateway may come as early as next quarter.
Take-Two's recovery may take a little more time. Yes, the new PlayStation 3 and Nintendo Wii are hitting the market before the seasonally potent holiday season, but video game software titles don't peak until the console has been on the market for a few years with a larger installed base. It may not take a total turnaround to get the stock back on track, though. Take-Two's stock has been cut in half over the past year. The pessimism is so thick you can cut it with a butter knife.
Hope is a four-letter word
Seducing the unloved may seem like a heartbreaker approach to investing. A stock's precipitous dive does not make it cheap. Only the gumption to spot the catalysts that will get the company's nose pointed in the right direction again makes it cheap.
If you want to be heartened by Gateway's potential, consider the Hewlett-Packard (NYSE:HPQ) story. Here's another company suffering through the same slowdown in the PC industry but which has risen above it, with a cost-shaving savant at the helm, who has led to quarterly reports that have been trouncing the market since he came on board five quarters ago.
And if you think all of the video game publishers have been toast this year, THQ (NASDAQ:THQI) has actually produced a double-digit stock gain in 2006 (through yesterday). The company wasn't as quick to warn about a holiday slowdown last year. It's had its share of slip-ups so far this year, but I believe its portfolio of kid-friendly titles based on younger fare like Cars and SpongeBob SquarePants makes THQ a little less vulnerable to the gaming cycle than pandering to the penny-pinching teens who don't want to buy games for a lame-duck console while saving up to buy the pricey new systems.
Opportunities are always out there for the taking. Both Intuit and Microsoft are Inside Value picks, and the newsletter is always serving up monthly potential prom dates for corsage-wielding investors.
So, you think you've had it with these Motley Fool stakes on the Motley Fool plain? Don't kid yourself. That's where the fun is waiting to be had.
Longtime Fool contributor Rick Munarriz does have a pair of Gateways in his house, though he favors working on his HP computer and Dell monitor. He does not own shares in any of the companies mentioned in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Fool has a disclosure policy.
