SIVY ON STOCKS from money.com
May 11, 2001

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Special situations

These tips for identifying investment opportunities will help you find
stocks that can move up even when the stock market is flat on its back.

By Michael Sivy

As long-time readers of this column know, I like to focus mainly on the
biggest, most financially healthy companies. Such blue-chip growth stocks
are well-followed by Wall Street analysts and by the media, so their
prospects are generally reflected in the share price. Occasionally,
however, those stocks get undervalued -- but they generally return to fair
valuations within a few years. If you buy them when they're down, odds are
you'll at least match -- and probably slightly outpace -- the general
market over a decade or longer. (For a list of the stocks I think are most
worth tracking, see the Sivy 100.)
[ http://www.money.com/sivy100/ ]

There are, however, smart ways to enhance that basic strategy. Some
investors, for example, search for so-called "special situations," stocks
that will rise or fall based on unique events, like a takeover bid or a
corporate restructuring. Anticipating such events takes some savvy, but
there are guideposts that can help. One excellent source for those tips is
The Superstock Investor, a new book by Charles LaLoggia and Cherrie Mahon,
published by McGraw Hill.

I've known Charlie for more than a decade and he's spotted a lot of great
opportunities, particularly among midcap and smaller stocks that aren't
well followed by analysts. In fact, I featured one of his recommendations
in Sivy on Stocks last November 8 -- United Industrial [UIC], a small
defense-related company with little debt. Since then, the stock has risen
40 percent to $16 a share.

Since every special situation is different, the best way to learn about
them is to read through a lot of case studies -- and Charlie's book is full
of them. But he also lists a number of signs to watch for that can help you
identify a stock poised for big gains. The most important thing to remember
is that a special situation needs a catalyst that can unlock its value.
Here are 10 potential triggers:

* An outside investor files a 13-D form with the Securities and Exchange
Commission, revealing that it has accumulated more than 5 percent of a
company's stock.

* A company with one outsider that owns more than 5 percent of the stock
attracts other investors who buy big stakes.

* An outside owner announces that it is seeking ways to enhance shareholder
value or expresses an interest in selling its stake.

* A dispute about the best way to get the stock price up breaks out between
a company's management and a major outside shareholder.

* A company with one or more large outside owners announces a stock buyback
program, giving more influence to the biggest shareholders who will push to
get the stock price up.

* A company in a consolidating industry sells or spins off non-core assets,
thereby turning itself into a pure play that is likely to be even more
attractive to potential acquirers.

* A company in a consolidating industry announces a restructuring charge
that causes its share price to decline substantially, making the stock
highly attractive to potential acquirers.

* A company in a consolidating industry is partially owned by a brokerage
or buyout firm that could devise a strategy to boost the value of its stake.

* The founder of a company who owns more than 10 percent of the stock
passes away, removing potential opposition to an acquisition.

* A company that owns a stake in another company is itself acquired,
leading the acquirer to try to raise cash by selling the stake and putting
the company in play.

None of these factors by itself is a reason to invest in a company. But if
the stock is attractive on fundamental grounds, the chance that it will
turn out to be a special situation provides an enormous kicker.

###

Post your comments on Michael's column at:
http://www.money.com/depts/investing/sivy/index.html

To subscribe or unsubscribe to Sivy on Stocks, go to:
http://www.money.com/email/

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