Last year, when I shared my five secrets for uncovering wealth-building tech stocks, I also told you about a sixth “rule” you can use to find the big-time profit opportunities that are flying under Wall Street’s radar screen.
I refer to these as “special-situation” investments because they tend to be companies that are grappling with unique challenges. Because of those challenges, analysts tend to ignore these stocks.
And that’s good for us.
You see, my special-situation recommendations tend to deliver booming gains – and usually at much-lower levels of risk than the overall market.
And the special-situation play I’m going to show you today has me really jazzed.
The company is getting ready to make a move that’s traditionally been a harbinger of hefty gains to come.
The CEO and two directors just bought thousands of shares.
And most Wall Street analysts hate the stock.
So once this stock begins its run, we’ll all be able to have a good laugh – at Wall Street’s expense.
Under the Radar
In the world of institutional investing, the term “special-situation play” covers one heck of a lot of ground.
You could be talking about corporate turnarounds, companies that are buyout candidates, firms that are poised to grow through acquisitions, even corporate-breakup stories.
The common denominator here is that we see some sort of “catalyst” that’s going to alter the status quo, to get new investors interested in the company’s stock, and push the share price higher.
This catalyst isn’t always obvious, meaning not everyone sees it or agrees it will have a beneficial impact. That’s why most of these special-situation stocks aren’t on Wall Street’s radar screen: Professional investors tend to view the underlying companies as being “broken,” or as “dead money” – meaning the share price isn’t expected to advance anytime soon.
And in the World of Wall Street – with its need for instant gratification – that’s a problem … and usually means the stock will continue to be ignored.
However, there’s a tiny subset of investment pros who are, well, special-situation specialists: They spend all their time trying to ferret out profit plays like the ones I’ve described. They try to identify the catalysts – the looming forces, currents or waves that can get a stock moving again – and figure out when and how hard those waves will hit.
Because these special-situation plays can be so profitable, these specialists get paid a lot of money to find them for the hedge funds, mutual funds, or elite money managers they work for.
But with the Strategic Tech Investor – as always- you’re getting today’s special-situation play for free.
Another “Boring” Big Gain
All the “smart-money” analysts up in New York have dismissed today’s special-situation recommendation as a boring old industrial play that’s broken and won’t be fixed for a long time.
But they don’t see what I see.
First, this company isn’t a “boring” rust-belt play: It’s actually in some of the most-exciting – and most-important – growth industries in today’s world economy: healthcare, water purification, medical-imaging, advanced materials, aviation, alternative energy.
So maybe you’ll be stunned when I confide that the company I’m referring to is General Electric Co. (NYSE: GE), the down-on-its-luck industrial giant that Wall Street believes will remain in stock-market “suspended animation” for a year or more to come.
In this case, however, Wall Street is wrong.
GE’s stock price is positioned to benefit from three powerful catalysts – any one of which should be enough to jump-start the stock.
Acting in concert, however, this trio of catalysts will act as the kind of “igniters” that will re-launch the stock, flinging it back into a high orbit.
Once Wall Street realizes what’s happening, you’ll start to see a stampede back into the shares – which will ignite a decent rally … one that will put General Electric back on the growth path it enjoyed for decades under former CEO Jack Welch.
But because Wall Street will be late to the party, the investment pros will miss the first part of the move – and will never catch up.
And because you are moving in early, you’ll get all the gains – and will benefit from all the money Wall Street fund managers will throw at the stock.
Of the three catalysts that I’m referring to, the first is a late-2013 dividend increase, which telegraphs the company’s confidence that the worst of its problems have been fixed. The second is a big block of insider buying – a signal that better times are coming, but one that Wall Street somehow didn’t receive. And the third is a planned “spin-off” of a key GE business – a transaction that’s a proven igniter of company share prices.
Let’s look at all three …
In 2000, after Welch retired, GE insider Jeffrey R. Immelt was selected to replace him.
It’s been rough going for Immelt.
The financial crisis of 2008-2009 hit GE hard. The corporation’s GE Capital unit – with assets that effectively ranked it as the sixth-largest U.S. bank – was “lumped-in” with other Wall Street investment banks and complex financial institutions, and GE’s stock was clobbered.
General Electric never really recovered.
The company’s stock price plunged, and in 2009 the dividend was slashed for the first time since 1938.
Now GE is back.
The parent company forced a massive overhaul of the GE Capital unit.
And the dividend – which once could be counted upon for its annual increases – is on the rise anew.
Back in December, for instance, GE boosted its quarterly dividend to 22 cents a share – a 15.8% increase from the quarter before. Companies that have gone through the pain of a dividend cut don’t usually reverse course and lift the payout anew unless the top execs are confident they can maintain it – kind of like keeping a promise to a friend.
The 22-cent-a-share quarterly payout – 88 cents on an annual basis – represents a payout ratio of about 50%, which should be sustainable.
Even more telling: This was the fourth straight annual dividend increase for General Electric, and underscores the management team’s belief in the company’s overall health.
The Real “Smart Money”
When you’ve been around the markets as long as I have, you understand one key point about the buying-and-selling of corporate insiders.
Insiders have many, many reasons to sell their shares.
But there’s really only one reason to buy. And that’s a belief that there’s big money to be made in their own company’s stock.
And when the CEO buys, that’s the best signal of all.
Last month, Immelt snapped up 40,000 shares of GE stock at slightly more than $25 a share – dropping a bit more than $1 million to make that happen. He now owns 1.86 million GE shares, worth about $47 million.
And Immelt wasn’t alone.
Two independent directors – Geoffrey Beattie and James Rohr – bought an aggregate 14,000 shares between them, spending $103,000 to do so.
Three execs … $1.1 million in purchases.
For Immelt, this open-market purchase is the CEO’s first since the first part of 2011. Back then, the CEO snapped up roughly the same number of shares – but at a price that was roughly $4 lower than this new purchase.
Many pieces of research underscore the predictive value of insider buying. In one study, for instance, University of Houston Prof. R. Richardson Pettit and P.C. Venkatesh from the Office of the Comptroller of the U.S. Currency found that insiders tend to increase their net purchases up to 24 months before a stock generates an above-average return.
The insider buying – coming on the heels of the dividend boosts – tells us those top GE leaders are expecting the company’s share price to rise.
And one special catalyst is going to get the stock moving.
I’m referring, of course, to a pending spin-off transaction.
When Breaking Up is Good to Do
General Electric intends to spin off the consumer-finance portion of its GE Capital unit in a two-stage transaction that could begin in the second quarter.
In a recent filing with the U.S. Securities and Exchange Commission (SEC), GE says it plans to sell about 20% of the finance unit in an IPO later this year. Analysts say the stock debut could be worth as much as $20 billion.
This is where things get really interesting for GE shareholders. In 2015, the global conglomerate plans to complete the spin-off through a special distribution to shareholders.
GE hasn’t disclosed the exact ratio of finance unit shares stockholders will get for each one they hold in the parent company. However, this spin-off will almost certainly follow the industry trend of making this distribution a tax-free transaction.
In other words, if you’re an existing GE shareholder, you’ll get shares of the spin-off unit without having to pony up any cash.
And you will be getting shares in a consumer finance unit that is one of the best in the business.
With 75 years’ experience, the business includes private label credit cards issued by retailers, other types of store credit and car loans covering roughly 55 million consumers.
And studies show time and again that spin-off transactions unlock meaningful wealth – in both the parent and in the spin-off company.
In fact, a number of institutional and academic research studies demonstrate that spin-off stocks trounce the general market averages for as long as three years after the transaction. For instance, a Lehman Bros. study found that spin-off companies beat the market by 40% in the first two years, while a Penn State University study found a three-year return of 76% – which was enough to beat the market by 31%).
Here’s the coup de grace: Many spin-off companies are ultimately taken over at hefty premiums to their market price.
To underscore that these studies have merit, let’s consider a couple of real-world examples.
In late 2011, the e-commerce company Expedia Inc. (NasdaqGS: EXPE) decided to spin off one of its travel divisions as a standalone company.
Since that time, shares of TripAdvisor Inc. (NasdaqGS: TRIP) have staged a spectacular rally. In the past two years, they’re up more than 180%, compared with 34% for the Standard & Poor’s 500 Index.
Then there’s the case of Exelis Inc. (NYSE: XLS), a military-technology specialist whose know-how ranges from surveillance to communications to advanced materials.
It was spun-off from ITT Corp. (NYSE: ITT) in 2011 and shares started trading that December. Over the past two years, shares of XLS have more than doubled the overall market’s return by posting gains of roughly 90%.
And if we compare it to a rival, we see that GE’s consumer-lending business should be a market-beater, too.
A Resurgent GE
At the end of the third quarter, GE’s consumer-finance unit had assets of roughly $53 billion. Analysts expect the division to earn about $2.2 billion for full-year 2013. That makes it about the same size as the credit card portfolio at Discover Financial Services (GE: DFS). Last year, Discover’s earnings rose 4% to roughly $2.4 billion (on total asset base of $79 billion).
Discover’s shareholders have done quite well over the past two years. The stock is up 96% in that period, nearly triple the S&P’s gain.
And the spin-off comes at an opportune time for GE shareholders. After getting hammered during the financial crisis, the unit has taken advantage in the resurgence in consumer borrowing.
Statistics compiled by the U.S. Federal Reserve show consumer lending has risen 24% since the end of 2009, to a projected $3.1 trillion for 2013.
The spin-off transaction is part of a broader restructuring that Immelt has been engineering for GE.
Having been burned during the downturn, Immelt is diminishing the role of finance and other non-strategic operations in the company’s sales and earnings. Instead, he wants to focus on GE’s core tech-related industrial mission.
Immelt has shed other units that are outside of his new mandate. These include the company’s plastics and reinsurance units as well as the entertainment company NBCUniversal.
The CEO has repositioned GE as a global maker of large and complex infrastructure items. We’re talking such big products as locomotives, power generators and energy-management systems.
And GE is particularly well-positioned to profit from a global aviation boom.
Consider that the FAA is projecting a roughly 50% increase in the number of annual air passengers to about 1.2 billion in just over a decade.
Together, Airbus SAS and The Boeing Co. (NYSE: BA) have a backlog of more than 10,000 aircraft. All those jets will take eight years to build – and that’s without either company taking a single new order.
GE traces its aviation leadership to World War I, when it added superchargers to boost the performance of gasoline-fueled engines.
In World War II, it built America’s first jet engine and has remained at the forefront of this technology ever since.
Today, GE makes engines for both military and commercial aircraft. They are the epitome of high-technology, for GE’s engines lead the industry in power and reliability.
For its commercial sales, the company counts both Boeing and Airbus as customers, giving it a long pipeline of engine orders stretching out more than a decade.
On the military side, it’s scored a trifecta: The company provides engines for fixed-wing aircraft, helicopters and drones, an increasingly popular vehicle with the Pentagon.
But GE’s involvement with the boom in global aviation isn’t limited to engine production.
The company runs a large maintenance division where it services engines, provides parts and even conducts complete overhauls. It also supplies aviation computing and air-traffic-management systems.
General Electric has a market cap of $252 billion, and its shares trade at roughly $25 each. The stock trades at less than 14 times forward earnings – in line with the market. It has profit margins and return on stockholder’s equity (ROE) of about 11.6%.
Over the last two years, GE stock has performed right in line with the S&P. But that figure doesn’t include the roughly 3.5% dividend.
Wall Street clearly has yet to price in the beneficial impact of the upcoming spin-off. So Immelt and the other insiders knew they were getting their shares at a bargain price level.
By moving in now, so can you.
In our mission to show you how to use technology investments to boost your net worth, special-situation stocks like GE can provide a very special boost.
That’s why, when opportunities like this come along, you don’t want to miss them.
Besides, in an era where Wall Street seems to regard Main Street investors with disdain, why miss out on a chance to turn the tables … and laugh all the way to the bank.
See you later this week.
[Editor’s Note: For new Strategic Tech Investor subscribers (or longtime readers who just want to review), Michael wanted to make sure you have the most updated version of his original “Five Rules for Tech-Investing Wealth” at the end of today’s report. As always, your comments and questions are welcomed.]
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