Tuesday, November 27, 2007
Transocean Inc. (NYSE:RIG) shares are up over four percent in today's trading as the stock continues its run despite a credit downgrade from Fitch. The stock is up recently on an announcement of its inclusion in the S&P 500, which will force many mutual funds to begin acquiring the shares during their next rebalance. It also marks the company as an industry giant.

So, is this downgrade worth worrying about? Well, Fitch downgraded the company's debt to BBB-, two notches above "junk" status, because of Transocean's intent to devote free cash flow during the next two years towards debt repayment. Luckily, the company has a very strong backlog and recently increased the diversification of its fleet, meaning that this may not be such a bad idea. In the end, the company will probably not have a problem with cash.

However, the company did establish a 364-day $15 billion bridge loan to fund its cash dividend to shareholders (as a result of the SantaFe merger), which will be reduced through a combination of debt and equity. This is what has caused some concern by the credit agency and several institutional investors because it means the company will be leveraging itself substantially in order to unlock value in its future cash flows in today's dollars.

In the end, Transocean is banking on the fact that it is underleveraged given its future cash prospects. This may be true, but we now know how quickly markets can turn when excess leverage is used. It was probably prudent for Fitch to cut ratings, but it doesn't mean their is a problem quite yet. Combined, these factors make RIG a stock worth watching!

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11/27/2007 7:49:50 PM UTC  #    Comments [0]  |  Trackback
 Monday, November 26, 2007
Steak n Shake (NYSE:SNS) may be in for a shake-up of its own after Sardar Biglari's Lion Fund increased its stake in the company from 7.3% to 8.6%, according to a Schedule 13D/A filing with the SEC. The activist hedge fund has been targeting the company lately, voicing their concern about mismanagement of the company by the present board of directors.

The move is welcomed by many investors frustrated with the company's recent performance. Shares in Stake n Shake have plummeted in recent weeks after it reported that net earnings dropped by more than 50 percent on same-store sales down 3.8% for fiscal 2007. According to one analyst, "I think the best way to describe it at this point is basically it's a big mess, and it's going to take some time to turn it around."

In fact, things have gotten so bad that disgruntled shareholders have formed a website (EnhanceStakenShake.com) and are placing billboard ads in the Indianapolis area lobbying for board seats. The campaign is spearheaded by The Lion Fund and is very similar to what happened when it lobbied for a sale of Friendly Ice Cream - which turned out to be a great success.

In the end, it is uncertain as to whether or not these efforts will pay off. The company has suffered horrible losses and shares are trading at a low. Many investors are hoping, however, that The Lion Fund can work to unlock shareholder value using the same successful tactics that it has in the past. Combined, these factors make SNS a stock worth watching!

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11/26/2007 7:57:07 PM UTC  #    Comments [0]  |  Trackback
Lahde Capital, a California-based hedge fund, has made more than 1,000 percent return this year by betting against subprime home loans, making it one of the world's best performing funds of all time. Andrew Lahde, the man behind the fund, noted that his returns had exceeded every estimate that he has ever offered any investor.

“We believe that all of these positions have further downside. However, the risk/return characteristics are far less attractive than they have been in the past. We do not plan on adding any positions at current levels. If the ABX indices were to bounce, we may short them again,” wrote Lahde in a letter to investors.

Lahde's portfolio consists primarily of short positions in AA down to BBB- holdings on the ABX index. The hedge fund plans to close out its positions in BBB- holdings within the next 90 days, only holding onto As and AAs, which will - according to the fund - take awhile to disintegrate but still may be worth nothing at all. Meanwhile, Lahde's new focus will be in a new fund that will short credit, as there is still plenty of bad credit to short!

In the end, this hedge fund's great performance can give us some insight into how much damage is left. Clearly, the scaling back of his position indicates that some of the mortgage problems may be coming to an end; however, there is still a lot of bad credit on the credit markets that may be worth shorting.

11/26/2007 3:52:10 PM UTC  #    Comments [1]  |  Trackback
Borders Group (NYSE:BGP) shares rose over four percent today after Bill Ackman's Pershing Square Capital Management disclosed an increased 17.1% stake in the company, according to a Schedule 13D/A filing with the SEC. The activist investor has reportedly been soliciting the board for its views on the firm's management, but gave no further details into his interest in the company.

Borders Group is well off of its 52-week highs of $24.15, trading at just $12.29 today. However, the company said last week that it expects its holiday sales be benefit from a toy backlash and strong best-seller lineup and customer rewards program. Management did not give an exact estimate, but did say that its fourth quarter earnings - excluding restructuring charges - will exceed last year's earnings from continuing operations of around $1.48 per share.

"If you mention the toy business, they have had a lot of issues there because of safety issues, recalls, etc.," said Borders CEO George Jones in a conference call with analysts. "We are going to have signing in our stores ... talking about what a nice, safe alternative books can be and what a great gift they are for kids."

Borders Group is also in the middle of a turnaround launched in March. The move includes the sale of some international stores, efforts to improve operates at U.S. bookstores, and the development of its own website to replace its existing agreement with Amazon.com. To this end, the company announced its decision to sell its 42 superstores and 28  Book etc. stores in the UK and Ireland for up to $40 million.

In the end, Ackman may be interested in the turnaround process combined with the potential boost obtained from the toy recalls in China. Others speculate that he may be interested in switching up management and implementing a new strategy. Regardless, these factors make BGP a stock worth watching!

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11/26/2007 3:40:45 PM UTC  #    Comments [0]  |  Trackback
 Wednesday, November 21, 2007
Transmeta Corporation (NDAQ:TMTA) shares rallied today after Riley Investments disclosed a 5.9% stake in the company and demanded that the company review its strategic alternatives. The activist hedge fund also indicated its belief that the stock is undervalued relative to its intrinsic value and peers. Shareholders are hoping that the company will heed the advice and work to unlock shareholder value.

Riley Investments said it believes that the public market valuation reflects a negative enterprise valuation despite strong prospects for positive free cash flow in 2008 and the five years for which it will be paid license fees under its recent agreement with Intel. Moreover, the hedge fund indicated that after Intel's first $150 million payment, Transmeta will have close to $180 million in cash on its balance sheets. This equals out to $13 per share in cash compared to the market value of $12 per share!

Riley Investments demanded that the company review its strategic options to enhance shareholder value. Specifically, the hedge fund recommended that the company sell the intellectual property to a company who can better leverage the costs associated with pursuing the strategy, delist from the NASDAQ, go "dark" to significantly reduce public company costs, or finally, engage in a significant dutch tender offer to unlock value.

In the end, this is all good news for shareholders as it means the company's intrinsic value could be realized. Whether or not the company takes action remains to be seen, but this is definitely a stock worth watching closely!

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11/21/2007 7:10:49 PM UTC  #    Comments [0]  |  Trackback
 Tuesday, November 20, 2007
Wynn Resorts Ltd. (NDAQ:WYNN) announced today that it would be issuing a $6.00 per share cash dividend for all shareholders of its common stock. The distribution will be payable December 10th for shareholders on record November 30th and will begin to trade ex-dividend on November 28th. Shares moved up over 6 percent on the news after a substantial drop yesterday.

The news comes amid a mass exodus from the casino stocks. Barrons came out yesterday saying that early profits from Macau were strong, but forecasts for this to continue fail to consider the impact of over-building and maturation. Since entering Macau, Wynn has surged more than 140 percent and it is going to slow down. They believe that investors are in for a surprise when they see margins being pressured.

Some analysts disagree, however, saying that forecasts are on-track for a total market size of over $15 billion by the end of 2010. However, one wildcard acknowledged by both parties is the risk of the Chinese government intervening with new rules and regulations that could curb growth. Combined, these factors make WYNN a stock worth watching!

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11/20/2007 5:52:29 PM UTC  #    Comments [0]  |  Trackback
Target Corporation (NYSE:TGT) shares are down marginally after the retailer announced disappointing third quarter earnings but managed to mask it with a giant share buyback. Shareholders are hoping that the company will be able to turn itself around in a tough sales environment, while many are encouraged by the giant share buyback announced.

"Our third quarter earnings were disappointing due to soft sales in our higher margin categories, leading to lower-than-expected gross margin in our core retail operations," said Chairman and CEO Bob Ulrich. "However, we have not observed any meaningful change in the intensity of the competitive environment and continue to believe that we are well-positioned to operate in a variety of sales environments going forward."

Target also announced a giant $10 billion share buyback program along with an update to credit card receivables unit that is still pending. In September, the company said it was considering selling $7 billion in credit card assets in order to unlock further value for shareholders. The buyback alone would result in nearly a quarter of its shares being repurchased while the $7 billion cash infusion from a sale would also be a windfall.

In the end, Sears is facing a variety of problems. The company is facing a credit downgrade and a tough competitive environment. However, a share buyback combined with the prospects of a $7 billion sale of its credit card division. Combined, these factors make TGT a stock worth watching!

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Sears Holding Corporation (SHLD)

11/20/2007 4:41:20 PM UTC  #    Comments [0]  |  Trackback
Sears Holding Corporation (NDAQ:SHLD) disclosed a 13.7% stake in Restoration Hardware Inc. (NDAQ:RSTO) and indicated that it may be interested in a takeover of the hardware company. The news comes after Restoration Hardware entered a definitive merger agreement at $6.70/share with an affiliate of Catterton Partners. Shareholders are hoping that Sears will make a higher bid and unlock additional value for shareholders.

Currently, Sears Holdings is seeking to obtain certain non-public information from Restoration Hardware and has indicated that it would enter into a confidentiality agreement to do so. The two companies have reportedly discussed the terms of such an agreement, but there is no guarantee that anything will come of it. Presumably, this agreement will enable Restoration Hardware to open its books and perhaps lead to a higher bid.

This speculation led to an 11.85% jump in the stock price today - far in excess of the $6.40 per share buyout offer that is currently on the table. Notably, this number is still well below the company's 52-week high of $9.17. But it is unclear whether Sears would raise the bid that significantly in order to beat out a $6.40 bid that is unlikely to be raised in response.

In the end, Sears' previous offer of $4.00/share was too low and an additional bid may be possible once they have more information about the company. This is great news for RSTO shareholders, as it could mean more money for the buyout. Combined, these factors make RSTO and SHLD two stocks worth watching closely!

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11/20/2007 4:24:37 PM UTC  #    Comments [0]  |  Trackback
 Monday, November 19, 2007
O'Charley's, Inc. (NDAQ:CHUX) may find itself under pressure from shareholders after activist investor Crescendo Partners disclosed an 8.9 percent stake in the company. The news came shortly after shares plummeted early Friday without reason. The restaurant chain is trading near its 52-week lows off of its high of $23.45 earlier this year.

O'Charley's is a casual dining restaurant company that owns and operates three restaurant concepts under the trade names O'Charley's, Ninety Nine Restaurants, and Stoney River Legendary Steaks. The company owns and operates 227 restaurants in 16 states along with six franchise operations. Restaurants have been a popular activist target recently with many activists demanding spin-offs or share buybacks to unlock value.

Crescendo Partners is most well known for its recent involvement with Topps, where it is attempting to force a buyout of the company. In this case, the hedge fund noted that it was not currently considering taking any typical activist action, but it may amend the filing in the future to include those possibilities. For now, the activist seems content in acquiring shares of the company at near a 52-week low.

In the end, this is a situation definitely worth watching as an activist investor is acquiring a sizable stake at near 52-week lows. Whether or not they will take future actions to actively unlock value remains to be seen, but the possibility is strong given the hedge fund's past actions. Combined, these factors make CHUX a stock worth following!

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11/19/2007 4:14:50 PM UTC  #    Comments [0]  |  Trackback
 Friday, November 16, 2007
E*Trade Financial (NYSE:ETFC) shares dropped marginally today after reports surfaced that the company may be looking to accept a cash infusion or sell itself to a competitor after a 60% cut in its market capitalization. The drop was fueled by analyst reports that there could be a run on deposits at E*Trade's bank, which reported a drop in the value of its mortgage holdings last week.

So, is E*Trade a value play at this point? Well, a cash infusion would likely increase investor confidence after the company's market cap fell to just $2.28 billion from $10.9 billion just a few weeks earlier. However, diluting the equity base might cause some issues with shareholders who have already seen a steep decline in the value of their holdings.

Meanwhile, a buyout may be the better option. The most likely suitor would be TD Ameritrade (NYSE:AMTD) and there would be plenty of benefits for the two firms as customer accounts could be transferred at almost no cost. Additionally, the long-term savings of such a combination would be over $600 million annually. In effect, this would make the deal pay for itself after five years or so.

In the end, this deal is great news for shareholders who stand to benefit from any such transaction. The brokerage also noted yesterday that it was not in any danger of default and would not face a cash crunch. Combined, these factors could mean a potential value play in the future.

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11/16/2007 7:11:01 PM UTC  #    Comments [0]  |  Trackback