BioFuel Energy (NDAQ:BIOF) is a development-stage company formed to build and operate a series of ethanol production facilities in the Midwest United States. The company went public on June 20th of this year and has drew the attention of investors today after Daniel Loeb's Third Point hedge fund disclosed a massive 30 percent stake in the company.

The billion dollar hedge fund manager has built up an impressive trackrecord through not only his activist investments but also his passive ones. In fact, his annual return since his fund's inception in 1995 stands at around 28 percent. Therefore, any investment made by this man is one that is definitely worth watching - particularly when it is a big bet in an emerging industry!

So, what other clues do we have from Daniel Loeb with regards to this investment? Well, all of their shares were obtained in a private placement that closed in conjunction with the initial public offering on June 19th. Notably, this placement included a $1.2 million investment from Loeb's personal funds. We also know that Loeb has sat on the company's board since May 2006, meaning this shouldn't be a fly-by-night investment. Combined, these factors make BIOF a stock worth keeping an eye on over the next few months!

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Vonage (NYSE:VG) shares rose $0.12, or 3.88%, to $3.21 after a federal appeals judge suggested a reprieve that might allow the VOIP provider to avoid its patent problems with Verizon. This is a critical legal battle for Vonage that could drive it into bankruptcy if the lower court decision is upheld. The company's shares have reflected this risk, dropping over 50% this year alone. Meanwhile, if the company's patent issues go away there could be significant share appreciation from these depressed levels.

So, what was this reprieve? Well, the federal appeals judge suggested that instead of blocking Vonage from using Verizon's patented technology, perhaps the startup company could be given a time period to develop an alternative method of developing its online telephone service that doesn't violate Verizon's patents. If other judges agree, the courts would then pass the case back down to lower courts with instructions to consider that possibility. However, the lower courts could decide to not even reconsider. So, there is a lot of possibilities with only one leading to a positive outcome for Vonage.

Meanwhile, Vonage indicated it was working on such a technology in May, but said it could take months to get operational. The problem the company is facing is the downtime between the development and implementation of this new technology where it would be forbidden from making any income. If a judge were to give the company time, it could save the company from bankruptcy and give it a second chance at life. This makes VG a stock worth watching!

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Lancaster Colony (NDAQ:LANC) faced criticism on Friday over its governance policies from a group of investors led by Barington Capital. The investors asked the consumer products maker to substantive changes to its governance policies as well as remove several takeover defenses that violate shareholder rights. Changes to these policies could enable shareholders like Barington to push for changes aimed at unlocking shareholder value.

In a letter to the board of directors on Friday, Barington Capital criticized Chairman and CEO John Gerlach and the company's founding family for consolidating their control of the company, saying, "We believe that the numerous defenses the company has in place are excessive and demonstrate disregard for the interest of Lancaster's public shareholders by facilitating the entrenchment of the company's directors and executive officers and minimizing the influence that shareholders have on the board."

Removal of these provisions could pave the way for shareholders like Barington Capital to unlock value. What might these actions include? Well, Lancaster said in April 2006 that it was exploring strategic alternatives, including a possible sale of its glassware and candles businesses. Meanwhile, Barington also pressured the company to take on $300 million in debt to finance and self-tender offer or similar transaction to create value for shareholders. If either of these transactions materialized, it could mean significant returns for shareholders. Combined, these factors make LANC a stock worth watching!

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Lehman Brothers (NYSE:LEH) has been a strong performer this year, moving up over 28 percent off of its lows, but the company is still struggling to join the likes of Morgan Stanley and Goldman Sachs as an elite investment bank. While most investors still think of Lehman Brothers as a bond house with potentially damaging exposure to mortgages, some are now beginning to see the firm in a new light.

What makes Lehman Brothers an attractive stock? Well, the firm's efforts to restructure itself have produced tangible results while its stock price has moved up relatively little. Specifically, the firm has made great progress in its move to diversify from fixed income into stocks and bonds both in the U.S. and broad. And the stock remains extremely undervalued - in fact, LEH trades at one of the lowest price-to-earnings multiples of any brokerage. And management knows the firm is undervalued. Mr. Fuld said, "Whether the world catches on today or tomorrow, I've got plenty of time for that. I like that we're not fully appreciated."

Lehman Brothers also has far less risk than other brokers who have used cheap credit to force otherwise unprofitable deals through their pipeline. While the firm is working on restructuring their balance sheet to take on more trading and deal risk, they still intend on making much safer bets than the competition. The firm also makes more money overseas than every other investment bank besides Goldman Sachs. These factors make LEH a safe bet in the event of a downturn in the economy that would materially hurt other firms' earnings.

In the end, Lehman Brothers is a company that is working to convert itself from a fixed-income firm to an elite investment bank like Goldman Sachs or Morgan Stanley. If it is successful, it could mean significant share appreciation from these levels. And the reduced amount of risk they are taking on makes them a safer bet than other investment banks in the event of a downturn in the economy. This makes LEH a stock worth watching!

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Kraft Foods (NYSE:KFT) shares moved up yesterday on news that billionaire investor Nelson Peltz took a 3 percent stake in the company. Shareholders and analysts had long been speculating that an activist investor could get involved with the company and force it to institute a massive share buyback, revive its first tier brands and sell or spin-off its second tier brands.

Nelson Peltz is well known for his past work with companies like Wendy's, whose shareholders experienced a more than 50% rise in value since his first involvement. Most of his larger prior deals have been in the restaurant and food business as well, adding to the probability that his Kraft involvement isn't simply putting money away for the kids!

So, what are his plans? Well, many analysts and investors expect the activist investor to first leverage up since it has debt amounting to less than two times EBITDA. Secondly, Peltz will likely demand that the company sell off its second tier brands in order to focus on reviving its best in class. These brands could include Post cereals and Maxwell House. And finally, he will likely boost spending in frozen foods and cheese in order to strengthen the company's two best product lines.

Combined, this is all good news for investors - but the timing couldn't have been worse for Peltz. The activist investor was not required to disclose his stake until it reached more than 5 percent of the company - this leak reportedly angered him. Now that investors know what he's likely up to, it may become much more expensive for him to purchase shares. Regardless, this is definitely a stock worth watching!

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Vertrue Inc. (NDAQ:VTRU) share rose today after Brencourt Advisors disclosed a 28% stake in the company and expressed their concerns over the company's proposed buyout. The hedge fund believes that the marketing company's current $48.50/share buyout price is insufficient and demanded that the board immediately reject the proposed offer. Shareholders are hoping that this effort will lead to a higher buyout offer.

Vertrue appears to be banking on a growing trend in the investment community - under-priced buyouts build to transfer wealth from shareholders to management and private equity interests. Addicted to quick gains from buyouts, many investors fail to take into account the long-term value of the company when considering buyout offers. Brencourt is hoping to bring the facts to light in order to convince investors that they can hold out for much more.

So, what's wrong with the $48.50/share buyout proposal? Well, Brencourt pointed out four different flaws in the bid:

1. Use of a size opinion in the WACC calculation - Broadview applied a "size premium" in order to boost the company's cost of equity and thereby lower the valuation. Investors were baffled by this as it is not accepted financial theory to include such a premium.
   
2. Incorrect cost of debt- Broadview used 9.25% as its cost of debt which is the coupon to the senior notes due 2014. The problem is that the cost of debt is actually the companies yield on its fixed securities, not its coupon!
   
3. Incorrect market premium - Broadview used a market premium of 7.8% to calculate the cost of equity. If anyone else used this market premium, there would be no leveraged buyout today that could be justified on a DFC basis. It simply doesn't make sense.
   
4. Absurdly low terminal value - Broadview used a terminal value of 6-7x EBITDA, which is an absurdly lower range.
   

Overall, the buyout process was flawed and led to a bid that is substantially below the true value of the company. Investors are hoping that Brencourt can force the company to seek a higher bid or maybe even hire another investment banking company to conduct a whole new sale process. If successful, it could mean significant upside for shareholders!

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ITC Deltacom Inc. (OTC:ITCD) has performed extremely well during the past year after shedding many of its unprofitable businesses while expanding the profitable ones. The telecommunication company's stock is up from a 52-week low of $0.70 to a high of $7.09. ITC hit a nerve with investors last week, however, when it proposed a recapitalization that would provide a massive payday for management while short-changing small non-controlling shareholders.

H Partners Capital disclosed a 6.4% stake in the company and detailed their concerns over the recapitalization in a letter to the company's board of directors. According to the company's 8-K filing with the SEC, the purpose of the recapitalization was to make the balance sheet more transparent by eliminating the confusing overhang of convertible preferred shares and warrants. H Partners insists, however, that this is completely unwarranted and the resulting dilution would hurt common stock shareholders.

So, why would the company do it? Well, the recapitalization would enable the company's controlling shareholder and other interested parties to convert their preferred shares and warrants to common stock at a more than 50% discount! According to H Partners, "The recapitalization is nothing more than the controlling shareholder and those acting in concert with it, reapprotioning equity to itself at the expense of non-controlling shareholders to the detriment of the company."

In the end, ITCD serves as a great example of how powerful shareholders and the board of directors can work in conjunction to enrich themselves at the cost of non-controlling shareholders. Rights offerings, recapitalizations and other financing techniques are often filed deep within SEC documents in ambiguous terms - rarely are we so lucky to have an investment firm outline the problems in plain English in a public complaint. This is something all investors in speculative companies should watch for on a regular basis as it could have severe negative implications for the companies involved.

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Bristol-Myers Squibb (NYSE:BMY) set a new 52-week high this week after a federal judge upheld a patent on Plavix - the company's best selling drug with over $938 million in first quarter sales. Many traders positioned themselves for further upside with more than 244,000 call options (mostly out of the money) trading hands yesterday on a base stock move of over four percent. The move indicates the increasing number of BMY bulls in the short term.

The drug company was also lifted by speculation that it could become the subject of a takeover by larger drug companies like Sanofi-Aventis. Now that the legal issues surrounding Bristol-Myers' #1 selling drug is cleared up, many investors believe the likelihood of such a deal has increased. Analysts peg the value of any deal in the mid to high 30s per share; however, wide-reaching partnerships with many companies in the industry may cause complications.

So, is this a stock worth buying? Well, clearly many investors and analysts are very bullish on the company while a giant legal cloud over its best drug has been lifted. Moreover, there is speculation that the company could receive buyout bids in the future. The company also has strong earnings and cash flows that have led to a strong bull trend in the stock price for more than a year. Combined, these factors have led to many trend followers along with opportunistic investors to jump onboard. Whether or not there is significant upside from here remains to be seen; however, we know that the options activity and past trends are all pointing up!

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ESS Technology (NDAQ:ESST) announced yesterday that it hired Neeham & Co. to help it evaluate strategic alternatives, which could include a total liquidation of the company. The move follows demands made by investment firm B. Riley & Co. that the company sell off its remaining businesses, sell its investment and real estate assets and return the proceeds to shareholders.

ESS Technology has struggled amid rising competition from chip designers in Taiwan and China along with increased pressure from larger rivals who have the ability to package technology similar to ESS' with complementary components. The semiconductor company has experienced eleven straight quarters of losses and is expected to lose money for the rest of 2007. This poor operating history combined with the company's small size caused concern among investors.

Last year, the company addressed these issuing in a broad restructuring effort aimed at curbing its operating expenses. These efforts resulted in the sale of its high-definition Blu-Ray DVD chip business and the closing of its camera phone business along with a 67% cut in their workforce. In the end, they were able to half their operating expenses and improve their bottom line; however, there is still a lot of concern as to the viability of any turnaround effort.

ESS Technology is currently undervalued on an asset basis; however, increased spending with no profitability in sight has kept most investors rather skeptical. Consequently, the new effort to explore strategic alternatives may be the only way the company can unlock significant value in the near-term. This makes ESST one worth watching!

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PHH Corporation (NYSE:PHH) may face increased criticism from shareholders concerned over its decision to pursue a sale of the company despite a poor valuation. Pennant Capital Management disclosed a 7.8% stake in the company and issued a letter to the board outlining their belief that the company's shares could be worth as much as $51/share - significantly higher than the current buyout premium of $31.50/share.

The outsource provider of mortgage and fleet management services issued their proxy statement on June 18th that paint a picture of a seller in panic mode as bidders were dropping out and even Blackstone blinked at the eleventh hour. Interestingly, the issues that caused the panic were all irrelevant or self-inflicted and temporary; the two main concerns were of the sub-prime meltdown and the inability to file financial statements on time. These factors led to a proposed buyout of just $31.50/share.

Pennant believes that the real value of the company can be pegged closer to $51/share within two years. The New Jersey based hedge fund proposed that the company separate its mortgage and fleet management segments via a tax-free spin-off, which could alone bring the stock price close to $36/share. Using deferred tax liability related to mortgage servicing rights, the company could also prevent around $10/share in tax leakage that they would experience in the event of a sale of the company.

PHH also reported better than expected results for full year 2006 and the first quarter of 2007. Using a 15x to 17x multiple of free cash flows, Pennant estimated that the fleet segment alone is worth between $17 to $20 per share. Incredibly, this valuation implies a sale of the mortgage segment at approximately 0.7x tangible book value! Meanwhile, the hedge fund values the company's mortgage business at $26 to $34 per share, which is an 8x to 10x multiple of the combined servicing and production after-tax earnings. Combining these two numbers, Pennant believes the company is worth $51 to $68 per share and could realize that value over the next two to three years.

In the end, Pennant believes that the proposed sale of the company is being conducted at a price far below the true value of PHH. Additionally, the company's preliminary proxy statement fails to address many critical issues including the benefits of rejecting the proposed sale of the company. Consequently, the hedge fund demanded that the company immediately amend its preliminary proxy statement to reflect these sentiments and give shareholders a fair view of the transaction. Combined, these factors make PHH a stock worth watching!

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