You Can Be a Stock Market Genius (Summary)
Forget trying to predict the next big tech stock. The greatest, most reliable stock market profits are hiding in plain sight, in the dusty, boring corners of the market that Wall Street professionals are paid to ignore: corporate spin-offs, restructurings, and merger announcements. These 'special situations' are where you can find bargains so good, they're almost unfair.
Spin-Offs Are a Goldmine
When a company sheds a division into a new, separate company, it creates one of the most consistently profitable investment opportunities. These new 'spin-offs' are often ignored and sold off indiscriminately by large institutions, leading to massive undervaluation.
Imagine a giant conglomerate spins off a small, non-core division. Large mutual funds that owned the parent company are often forced to sell their new shares of the spin-off, not because it's a bad business, but because it's too small for their portfolio rules. This wave of forced, uninformed selling creates a temporary fire-sale price for savvy individual investors who can step in and buy a good company for far less than it's worth.
Profit from Corporate Deals with Risk Arbitrage
When an acquisition is announced, the target company's stock price jumps, but it rarely goes all the way to the deal price. This small gap represents the market's fear that the deal might fail. By analyzing the deal's probability, you can capture this spread for high, low-risk, bond-like returns.
Company A announces it will buy Company B for $25 per share. Company B's stock might jump to only $24. An investor can buy the stock at $24. If the deal closes as expected in three months, they make $1 per share. That's a 4.1% return in three months, which is an annualized return of over 16%—all with risk that is tied to the deal closing, not the whims of the overall stock market.
Find Treasure in the Trash Heap of Bankruptcy
While most investors flee from bankrupt companies, the legal reorganization process (like Chapter 11) can create incredible opportunities. The common stock might be worthless, but other securities, like bonds or preferred stock, can be converted into new shares of a now-healthy, debt-free company at bargain-basement prices.
A company files for bankruptcy to restructure its debt. Its bonds might trade for 20 cents on the dollar. As part of the reorganization plan, those bondholders might receive all the new stock in the reorganized company. You could buy the debt for pennies and end up owning a piece of a viable, profitable business that emerges from bankruptcy, potentially turning your 20-cent investment into 80 cents or more.
Look for 'Stubs' and Partial Offerings
Sometimes a company will sell off a portion of a subsidiary to the public while retaining a majority stake. By analyzing the value of the parent company and the spun-off portion, you can often buy the remaining 'stub' of the parent company for a price that implies you're getting the rest of its businesses for free, or even less than free.
In the 1980s, a holding company called Liberty Corp sold a 20% stake in its main television assets. The market valued that 20% stake so highly that it was worth more than the entire market capitalization of the parent Liberty Corp. By buying the parent company, an investor was effectively getting the remaining 80% of the TV assets plus all of Liberty's other businesses for a negative price.
