• Choose a category
• All
• Classic-Fiction

By Root 2851 0

But what about your “bargain issues”? Can one really make money in them without taking a serious risk? Yes indeed, if you can find enough of them to make a diversified group, and if you don’t lose patience if they fail to advance soon after you buy them. Sometimes the patience needed may appear quite considerable. In our previous edition we hazarded a single example (p. 188) which was current as we wrote. It was Burton-Dixie Corp., with stock selling at 20, against net-current-asset value of 30, and book value of about 50. A profit on that purchase would not have been immediate. But in August 1967 all the shareholders were offered 53 3/4 for their shares, probably at just about book value. A patient holder, who had bought the shares in March 1964 at 20 would have had a profit of 165% in 3½ years—a noncompounded annual return of 47%. Most of the bargain issues in our experience have not taken that long to show good profits–nor have they shown so high a rate. For a somewhat similar situation, current as we write, see our discussion of National Presto Industries above, p. 168.

Special Situations or “Workouts”

Let us touch briefly on this area, since it is theoretically includable in the program of operations of an enterprising investor. It was commented upon above. Here we shall supply some examples of the genre, and some further remarks on what it appears to offer an open-minded and alert investor.

Three such situations, among others, were current early in 1971, and they may be summarized as follows:

SITUATION 1. Acquisition of Kayser-Roth by Borden’s. In January 1971 Borden Inc. announced a plan to acquire control of Kayser-Roth (“diversified apparel”) by giving 1 1/3 shares of its own stock in exchange for one share of Kayser-Roth. On the following day, in active trading. Borden closed at 26 and Kayser-Roth at 28. If an “operator” had bought 300 shares of Kayser-Roth and sold 400 Borden at these prices and if the deal were later consummated on the announced terms, he would have had a profit of some 24% on the cost of his shares, less commissions and some other items. Assuming the deal had gone through in six months, his final profit might have been at about a 40% per annum rate.

SITUATION 2. In November 1970 National Biscuit Co. offered to buy control of Aurora Plastics Co. at $11 in cash. The stock was selling at about 8½; it closed the month at 9 and continued to sell there at year-end. Here the gross profit indicated was originally about 25%, subject to the risks of nonconsummation and to the time element.

SITUATION 3. Universal-Marion Co., which had ceased its business operations, asked its shareholders to ratify dissolution of the concern. The treasurer indicated that the common stock had a book value of about $28½ per share, a substantial part of which was in liquid form. The stock closed 1970 at 21½, indicating a possible gross profit here, if book value was realized in liquidation, of more than 30%.

If operations of this kind, conducted on a diversified basis for spreading the risk, could be counted to yield annual profits of, say, 20% or better, they would undoubtedly be more than merely worthwhile. Since this is not a book on “special situations,” we are not going into the details of the business—for it really is a business. Let us point out two contradictory developments there in recent years. On the one hand the number of deals to choose from has increased enormously, as compared with, say, ten years ago. This is a consequence of what might be called a mania of corporations to diversify their activities through various types of acquisitions, etc. In 1970 the number of “merger announcements” aggregated some 5,000, down from over 6,000 in 1969. The total money values involved in these deals amounted to many, many billions. Perhaps only a small fraction of the 5,000 announcements could have presented a clear-cut opportunity for purchase of shares by a special-situations man, but this fraction was still large enough to keep him busy studying, picking, and choosing.

The other side of the picture is that