Winning the stock market wars
When companies get into a dogfight on the stock market, says this Canadian analyst, alert investors can wind up on the winning side.
These aren’t shooting wars, but they can get pretty bitter.
These are wars that are fought on the stock market and they involve short selling, backstabbing and assorted other aggressive tactics.
There are winners and losers, although happily no physical casualties. Among the winners are investors who back the victorious side.
Our guide to these contests is Mr. Peter Hodson. He is a Senior Portfolio Manager at Sprott Asset Management. And he relates his adventures in investing regularly in Investor's Digest of Canada.
In his latest story, he tells the tale of three separate battles. They’re all in industries normally given over to leisure or relaxation, but there’s nothing leisurely about the way these struggles have been conducted.
Just call them Coffee Wars, Book Wars and Video Rental Wars.
The real winners
While you won’t find many people who are in favor of war on the large scale, Mr. Hodson writes, the sort of paper war he is describing can be both entertaining and profitable. And no lives will be lost.
But money will be made. The first battle he narrates is in the coffee industry. The prize is Diedrich Coffee Inc. (NASDQ-DDRX). The combatants are Peet’s Coffee & Tea (NASDQ-PEET) on one side and Green Mountain Coffee Roasters (NASDQ-GMCR) on the other.
Diedrich, which is located in Orange County, California, has been in business for over 90 years. And even before the bidding war for the firm began, says Mr. Hodson, it had “an earlier skirmish with short sellers who couldn’t believe how fast the stock was rising. Diedrich clearly won that war.” During 2009, the stock soared from $0.21 to well above $30.
The bidding war began in November with a $26-per-share bid from Peet’s. Green Mountain shot back with an offer of $30 per share. Peet’s counter-attacked with $32. Back came Green Mountain (this is better than a video game) in a “full-on assault” with a $35 cash bid.
That bid was the winner and Diedrich shareholders were asked to tender to it by January 11. The total value of the deal is $290 million.
The real winners, of course, were the Diedrich shareholders. Over the course of 2009 alone they saw the value of their shares rise by more than 9,600 per cent! “The profits will keep their pantries well supplied with coffee for a while,” sums up Mr. Hodson.
A three-way battle
Many people drink coffee and read at the same time. But now they can do so with traditional books or hand-held electronic books. The battle between the two is heating up. And it’s not just a two-way battle.
There are three big contestants in this fight, the analyst tells us. Two are hand-held makers taking on each other. The third is a vast retail chain marketing good old paper books.
Amazon (NASDQ-AMZN) literally owned the hand-held book market for a time with its Kindle device, which downloads, stores and displays books for reading.
The first reaction to the Kindle was not from an electronic competitor, but from Wal-Mart (NYSE-WMT), which began aggressively lowering the price of hardcover books.
Then into fray jumped Sony (NYSE-SNE) with the Reader Digital Book, which can hold 160 books at a time.
On the market, it’s not entirely clear who the winner will be. Amazon suddenly doesn’t own the hand-held market any more. Still, when Mr. Hodson wrote late last month, Amazon’s shares were up 165 per cent for 2009. They’ve slipped a bit and now trade at $133.20. Sony’s shares were up just 30 per cent then. They’ve risen a bit and stand at $29.76.
Wal-Mart’s shares, down about two per cent over the course of 2009, are holding steady at $53.76. And unlike the other two, it pays a dividend, which yields just over 2 per cent.
The true winner, Mr. Hodson suspects, will be the consumer who is watching the fall in the price of books, whatever form they take.
A fourth soldier
The analyst concludes with another struggle that has three contestants, and maybe a fourth, if you expand the borders of the battlefield.
The fight here is over video rental kiosks. It began as a mano-a-mano contest between Coinstar Inc. (NASDQ-CSTR) and a famous rival, Blockbuster (NYSE-BBI).
Coinstar essentially created the business of video rental kiosks. Viewers can rent movies for $1 a day at its Redbox kiosks strategically set up at grocery stores and similar sites.
The third player is a fifth column, so to speak, brought in by one of the two combatants. NCR Corp. (NYSE-NCR) announced last month that it would open 200 video rental kiosks in New York City under the Blockbuster name. Many see this as a direct strike at Coinstar, which has only three kiosks in that city.
The consumer should win this one as well, Mr. Hodson points out, as rentals get cheaper. But the stock market fallout is interesting too.
Coinstar, which got there first with its kiosks, saw its stock rise 37 per cent in 2009, although it has been up and down recently. Pointing up in the past few weeks, it stands at $29.
Blockbuster and NCR both saw their shares fall considerably over the course of 2009. At $0.73, Blockbuster doesn’t appear to going anywhere fast. At $11.33, NCR has had a slight rebound.
But there’s a fourth solider in the fight, Mr. Hodson tells his Investor's Digest of Canada readers. This is Netflix (NASDQ-NFLX) with its direct-download movie service. Its share price rose by a spine-tingling 125 per cent in 2009. It has come down a bit lately to sit at $52.16.
“This war is surely not over and in fact is likely to get bigger,” concludes the analyst. Stock market struggles can get ugly for the participants, he adds, but the results can be pretty for investors.
In politics, sports and yes war itself, waiting to see who the eventual winner may be before taking sides is usually viewed as a rather shabby tactic. But in the stock market wars, it’s a strategy that’s smart, admirable and profitable.
|
E-mail this article
Printer-Friendly
