TEAMFLY Team-Fly ® THE SUPERSTOCK INVESTOR FM 7/9/01 8:43 AM Page i This page intentionally left blank. THE SUPERSTOCK INVESTOR Profiting from Wall Street’s Best Undervalued Companies Charles M. LaLoggia Cherrie A. Mahon McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto FM 7/9/01 8:43 AM Page iii Copyright © 2001 by the McGraw-Hill Companies Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-138116-3 The material in this eBook also appears in the print version of this title: 0-07-136083-2 All trademarks are trademarks of their respective owners. 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DOI: 10.1036/0071381163 abc McGraw-Hill CONTENTS ACKNOWLEDGMENTS ix INTRODUCTION 1 PART ONE THE MAKING OF A SUPERSTOCK INVESTOR Chapter One A Defining Moment 11 Chapter Two A Superstock Is Born 15 Chapter Three Stock Selection 19 Chapter Four Investing Paradigms: A New Way of Thinking about Stock Selection 25 Chapter Five The Twilight of Index Investing 31 Chapter Six Experts: What Do They Know? 35 Case Study: Sunbeam 46 Chapter Seven What Is Value? 57 v FM 7/9/01 8:43 AM Page v Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use. Chapter Eight If Everybody Knows Everything, Then Nobody Knows Anything 65 PART TWO IDENTIFYING TAKEOVER TARGETS Chapter Nine Creeping Takeovers 77 Case Study: How Rexel S.A. Acquired Rexel Inc. 78 Case Study: The Takeover of ADT 85 Chapter Ten How to Create Your Own “Research Universe” of Takeover Candidates—The Telltale Signs 95 Case Study: Spotting Brylane as a Takeover Target 106 Case Study: Sam Heyman and Dexter Corp. 111 Chapter Eleven How to Use the Financial Press 125 Case Study: The Triple Play and Midway Games 140 Chapter Twelve Family Feuds 149 Case Study: Copley Pharmaceuticals 149 PART THREE TAKEOVER CLUES Chapter Thirteen “Beneficial Owner” Buying 159 Case Study: Sumner Redstone and WMS Industries 159 vi CONTENTS FM 7/9/01 8:43 AM Page vi Chapter Fourteen The “Pure Play” and the Drugstore Industry 187 Case Study: Fay’s and Genovese 190 Case Study: Smith Food & Drug Centers 201 Chapter Fifteen Using Charts 205 Case Study: Salick Health Care 207 Case Study: Rohr, Inc. 210 Chapter Sixteen The Domino Effect 215 Case Study: Vivra and Ren-Corp. USA 215 Case Study: Renal Treatment Centers 219 Chapter Seventeen Merger Mania: Take the Money and Run 223 Case Study: JCPenney and Rite Aid 233 Case Study: The Alarming Story of Protection One 238 Case Study: How Mattel Got Played by The Learning Company 247 Case Study: Waste Management and Allied Waste Industries 251 Chapter Eighteen Look for Multiple Telltale Signs 259 Case Study: Sugen, Inc. 260 Case Study: Frontier Corp. 266 Case Study: Water Utilities 271 APPENDIX: A SUPERSTOCK SHOPPING LIST 285 RESOURCES 295 INDEX 297 CONTENTS vii FM 7/9/01 8:43 AM Page vii This page intentionally left blank. ACKNOWLEDGMENTS I would like to thank the person who inspired this book and with- out whom it would not have been written: my friend, my business partner, and Director of Research, Cherrie Mahon. This book was actually born when I met Cherrie in 1998. She was a stockbroker at the time and was endlessly inquisitive about my newsletter, research techniques, and rather unusual approach to stock selection in com- parison to what she was learning at the major “mainstream” bro- kerage firm that employed her. She seemed to recognize that my way of thinking was different from anything she had been exposed to, and her constant search for answers forced me, for the first time, to think about and explain, in detail, the thought processes that went into the recommendations in the newsletter. In a way, Cherrie’s inter- rogating and seemingly endless curiosity forced me to turn an approach that had been based mostly on instinct and experience into an understandable and, I hope, instructive set of principles and guidelines that can be used by any investor willing to take the time and effort to learn how to use them. Obviously, I have done a lot of writing over the years, but writ- ing a book is different. If it were not for Cherrie, this book would not have been born—and if it were not for Cherrie, I probably never would have had the determination to complete it. Her support throughout this process was invaluable. Charles M. LaLoggia ix FM 7/9/01 8:43 AM Page ix Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use. [...]... diversion from the predictability of day-to-day life I completely understand this, of course, having spent 25 years of my life transfixed by the stock market Watching the minute-by-minute analysis on financial television and having a real-time quote system on your desk is part of the appeal of the whole business Nothing wrong with that, although this book is a way of pointing out that there is another way... individual—and sometimes even the management of the company— 11 Copyright 2001 The McGraw- Hill Companies, Inc Click Here for Terms of Use Chap 01 7/9/01 8:44 AM Page 12 12 PART ONE The Making of a Superstock Investor offers to pay a premium over the prevailing price to buy all outstanding shares Other catalysts include a massive partial stock buyback at a premium In this scenario, the company offers to acquire... Average dropped 96 points The following day the Dow fell 299 points, and American Stores once again bucked the trend, rising another 13⁄16 With that performance, American Stores joined the ranks of the superstocks—stocks that have the ability to rise quickly and substantially in price no matter what the general stock market is doing What propelled American Stores into the ranks of the superstocks? A takeover... watched their stock soar in price as the general stock market collapsed over a 2-day period Takeover! There is no sweeter sound for an investor than to wake up to discover that a stock is the subject of a takeover bid at a huge premium over the previous day’s closing price It’s not uncommon for takeover bids to drive a stock price higher by 25 percent, 50 percent, 15 Copyright 2001 The McGraw- Hill Companies,... takeover candidates that do not respond to the general market can be frustrating to own when the market is going up, they can be rewarding when they march to their own drummer while the rest of the stock market is marching off a cliff, as many investors learned in 2000 In this book you will learn how to spot the Telltale Signs of a seemingly sleepy, out-of-favor stock with nothing much apparently going... things I have learned over the years It’s an approach to investing that has served me well, and if you learn to use it, it will do the same for you THE BULLS, THE BEARS, AND THE HORSES The recent trend toward microanalyzing the stock market on a minute-by-minute basis has less to do with investing than it does with providing a “fix” for stock market addicts In his classic book The Money Game, author George... attention to the value of its remaining ownership These potential catalysts, as well as others, can suddenly turn a previously boring, uninteresting company into a superstock a stock that rises dramatically in price, usually over a one- to two-day period, regardless of what the overall stock market is doing A LIGHTBULB GOES ON The early 1970s were a difficult time for the U.S economy and also for the stock... gets when your bet is down, the bell rings, the starting gate opens, and the track announcer says, “They’re off!” This, of course, is precisely the feeling a day trader gets at ninethirty each morning when he or she is tuned in to CNBC The only difference is that the chairman of Time Warner is not standing at the starting gate ringing the bell It is probably no accident that as the stock market has become... compete with this? For one thing, they might try out the concept of horse brokers In New York State there are Off Track Betting parlors scattered all over the place What’s the difference between this and brokerage firm branch offices? There are no horse brokers The only thing these OTB parlors lack are salesmen with clients who can be badgered over the telephone to bet on the horses and generate some commission... on the favorite, to show? One reason the stock market fascinates so many of us is that there are so many ways to approach it This frantic moment-tomoment approach, in which the market is treated as though it were a racetrack or a casino, is certainly a valid way This book is about a different way Chap 01 7/9/01 8:44 AM Page 9 P A R T O N E The Making of a Superstock Investor Copyright 2001 The McGraw- Hill . without the prior written permission of the publisher. 0-0 7-1 3811 6-3 The material in this eBook also appears in the print version of this title: 0-0 7-1 3608 3-2 All trademarks are trademarks of their. work and The McGraw- Hill Companies, Inc. ( McGraw- Hill ) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright. right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS”. McGRAW- HILLAND ITS LICENSORS MAKE NO GUAR- ANTEES OR WARRANTIES AS TO THE ACCURACY,