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. [...]... 1 12 8 21 3 5 11 10 19 9 11 9 7 42 28 21 2 27 56 6 2 2 7 8 28 1 17 25 10 28 23 27 1 5 7 Percent Gain (or Loss) +19 +70 +85 +11 9 + 41 +36 +38 +10 0 +10 +77 +23 +30 +50 +16 9 +15 6 + 21 +52 + 219 +53 +75 +25 +20 +46 + 21 +36 +32 +16 3 +16 +43 +2 61 +11 0 +12 4 +0 +10 0 +10 5 Percent Annualized Gain (or Loss) +230 +70 +12 7 +88 +16 4 +86.4 + 41. 4 +12 0 +6.3 +10 2.6 +25 .1 +40 +85.7 +48.2 +54 +12 + 312 +97.3 +11 .3 +15 0 +15 0... Bally Corp Jun ’96 Community Health Apr ’96 Hemlo Gold Feb ’96 Loral Corp 36 40 7 36 6 9 12 4 7 2 11 12 10 Percent Gain (or Loss) +14 3 +292 +50 +11 9 +10 0 +50 +22 +16 +87 +20 +40 +29 +15 Percent Annualized Gain (or Loss) +47.6 +87.6 +85.7 +39.6 +200 +66.6 +22 +48 +14 9 .1 +12 0 +43.6 +29 +18 in this book, I considered them takeover candidates No “magic” insights will be revealed here; instead, this book... individual—and sometimes even the management of the company— 11 Copyright 20 01 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... Annualized Gain (or Loss) +230 +70 +12 7 +88 +16 4 +86.4 + 41. 4 +12 0 +6.3 +10 2.6 +25 .1 +40 +85.7 +48.2 +54 +12 + 312 +97.3 +11 .3 +15 0 +15 0 +12 0 +78.8 + 31. 5 +15 .4 +384 +11 5 +7.7 + 51. 6 +11 1.8 +57.4 +55 .1 +0 +240 +18 0 Continued Introduction 7/9/ 01 8:44 AM Page 4 INTRODUCTION 4 T a b l e I 1 Charles M LaLoggia’s 48 Takeover Bids in 55 Months (continued) Months Held Jul ’97 Rotech Medical May ’97 Logicon May ’97 Smith... which the Dow Jones Industrial 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. .. stock and reinstated the annual $3.20 dividend, the stock was selling at $47 This literally forced the stock market to revalue the preferred stock at a higher level since that $3.20 annual dividend would have created a yield of almost 18 percent, based on the original price of 18 1⁄2—far too high a yield To adjust for the fact that the dividend was once again being paid, the price of the preferred stock... percent, 50 percent, 15 Copyright 20 01 The McGraw-Hill Companies, Inc Click Here for Terms of Use Chap 02 7/9/ 01 16 8:45 AM Page 16 PART ONE The Making of a Superstock Investor or even more in a single day—usually in a single trade, right at the opening bell, following the announcement that Company A is offering to buy Company B And while, to a casual observer, it may seem that these takeover bids... elevate a stock out of the usually unpredictable world of Wall Street and into another world It is these events that create the world of “superstocks.” Chap 02 7/9/ 01 8:45 AM Page 15 C H A P T E R T W O A Superstock Is Born O n August 3, 19 98, American Stores, a supermarket and drugstore company, jumped 53⁄4 points, or 25 percent American Stores was the largest percentage gainer on the New York Stock Exchange... on the preferred, and they were accumulating “in arrears.” And like LTV, Avco’s earnings had taken a major turn for the better, and its common stockholders were pushing for dividends on the common shares, which could only be paid if the arrears were paid on the cumulative preferred stock I recommended Avco $3.20 Cumulative Preferred in August 19 75 at 18 1⁄2 After Avco paid all of the arrears on the. .. account 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 20 01 The McGraw-Hill . Harvey’s Casino 1 +32 +384 Feb ’98 Arbor Drugs 17 +16 3 +11 5 Dec ’97 Showboat 25 +16 +7.7 Nov ’97 Holmes Protection 10 +43 + 51. 6 Nov ’97 Renal Treatment 28 +2 61 +11 1.8 Sep ’97 Rexel Corp 23 +11 0 +57.4 Sep. E’Town Corp 11 +38 + 41. 4 Oct. ’99 SJW Corp 10 +10 0 +12 0 Sep ’99 Nichols Research 19 +10 +6.3 Aug ’99 United Water Resources 9 +77 +10 2.6 Aug ’99 Copley Pharmaceuticals 11 +23 +25 .1 July ’99 Red. whether such claim or cause arises in contract, tort or otherwise. DOI: 10 .10 36/00 713 811 63 abc McGraw-Hill CONTENTS ACKNOWLEDGMENTS ix INTRODUCTION 1 PART ONE THE MAKING OF A SUPERSTOCK INVESTOR Chapter