Sharper Image Corporation (NDAQ:SHRP) shares dropped after the company posted wider losses for the third quarter, hurt by a 35 percent drop in sales. The specialty retailer reported a net loss of $1.50 per share compared to analyst estimates of a $1.31 per share loss on sales that actually beat Wall Street expectations of $67.4 million. Shareholders are hoping that one new development, however, will change the trend.

The Clinton Group caught shareholder attention when they disclosed an increased stake, from 157,000 shares to 1.09 million shares, and now controls approximately 7.2% of Sharper Image. The activist hedge fund did not make any specific comments regarding their intentions, but many shareholders are anticipating some kind of action in the near future given the hedge fund's reputation on Wall Street.

Sharper Image still faces an uphill battle, however, with the stock being down 64% so far this year and 82% during the last five years. Moreover, with 31% of its shares shorted, there is a lot of interest in keeping the stock down. However, any significant changes could also force a short squeeze and jump shares of the company in the short-term. Combined, these factors make SHRP a stock worth watching!

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Cadbury Schweppes (NYSE:CSG) shares moved up this week after activist investor Nelson Peltz reported raised his stake in the company from 3.47% to 4.5%, according to a report put out by the company. No official confirmation could be made because Peltz owns less than 5% of the company and is not required to report to the SEC. The move comes amid a split-up that is just now showing signs of success with the company raising its full-year guidance.

Cadbury announced that it would be beating its growth goal of four to six percent; however, analysts were quick to point out that the gains come against a relatively weak quarter last year. Moreover, there are concerns that the company's revenues will be hurt by the currency exchange rate. Remember, the dollar continues to extremely low compared to the euro, which is hurting exports in many European firms.

Cadbury's Americas Beverages unit, which is being spun off, also reported modest year-over-year progress in underlying operating proft. The future of this unit was recently sealed after the firm came under pressure from billionaire investor Nelson Peltz to separate the candy and beverages arms. This split up should unlock substantial value for investors who have dealt with a stagnant share price for some time now.

In the end, this will likely be a great move for the troubled Cadbury, but many feel that it is already reflected in the share price. Investors were encouraged with Peltz increased his holdings, but the stock has since returned to previous levels. Regardless, this is definitely a stock worth watching!

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Royal Philips Electronics (NYSE:PHG) shares jumped today after two activist hedge funds teamed up to confront the company over its results and capital structure. Jana Partners and D.E. Shaw Group announced today that they plan to act together to jointly communicate their views regarding the electronic-maker’s operating performance and capital structure. Shareholders applauded the move as shares rose over four percent on the day.

The move comes after CEO Gerard Kleisterlee sold most of the company’s semiconductor assets and reduced the company’s stake in a flat-panel display venture to focus on medical scanners, appliances and lighting. These actions have provided Philips with around $30 billion in spare cash for purchases, buybacks and dividends over the next three years. Obviously, this has led to speculation that the activists are intent on unlocking this value and distributing the cash to shareholders. However, they may face some problems as Philips has been rather intent on what it plans to do with its cash pile.

The two hedge funds do have a strong track record of success, however, with successes in breaking up or selling ABN Amro – which became the largest bank sale in history after 183 years of independence. In the end, the hedge funds are targeting the cash position while the company likely wants more time to build out its plan. However, given the stagnant shares recently, a success on the part of the hedge funds may be in the cards. Combined, these factors make PHG a stock worth watching!

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Pershing Square Capital Management, the $6 billion activist hedge fund, is reportedly considering a public offering for one of its funds during the next couple of years. Bill Ackman, the famous man behind the fund, said that tapping public markets for funds would give it capacity to make larger investments and have more influence in its activist shareholder campaigns.

The move would follow that of several other hedge funds and private equity firms that have recently gone public. Fortress Investment Group (FIG) and Och-Ziff Capital Management (OZM) are the two most recent such hedge funds that have listed on the New York Stock Exchange; however, shares in both firms have declined since their IPO casting doubt on the viability of public hedge funds.

"The natural evolution at some point is that I believe our fund will be publicly traded," said Ackman, speaking at a New York conference on Wednesday. "It would give us more staying power and credibility with management. If we had permanent capital I think it would be good for investors and good for us."

Many investors have been watching Ackman’s Pershing Square since its successes in McDonalds (MCD) and Ceridian Corp. (CEN) where it won activist campaigns to unlock shareholder value. The famed activist acquired shares in McDonalds at around $28 only to have them rise to their current level around $60 while it has already raked in healthy gains in Ceridian at the same time. Investors are currently watching his long position in Target Corp. (TGT) and his short positions in MBIA Inc. (MBI) and Ambac Financial Group (ABK).

In the end, Bill Ackman is a very successful investor that definitely knows what he is doing. It will be interesting to see if any of his funds end up going public as they could represent great opportunities for investors to latch on to his great success much more easily than following SEC filings. Combined, these factors make Pershing Square a hedge fund worth watching!

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Mac-Gray Corporation (NYSE:TUC) executives may have to fight for their jobs after an activist hedge fund expressed their concerns about the company in a letter to the board of directors. Fairview Capital Investment Management voiced its apprehension over the laundry company’s growth and capital allocation strategies and suggested that it either pursue a high-dividend payout model or a sale in order to unlock shareholder value.

“Ever since its ill-fated attempts to enter other lines of business through the MicroFridge and Copico acquisitions in the late 1990s, Mac-Gray has focused on its core laundry facilities management business,” said Clark & Mathieson of Fairview Capital. “Despite achieving the revenue and EBITDA growth targets needed to earn large bonuses for Management, these investments have not led to improvements in ROIC, ROE, or EPS.”

Fairview Capital encouraged the company to remedy this problem by instituting a high-dividend payout model or pursuing a sale. The first option would entail the company restricting its annual acquisition and capital spending to $25 million and returning excess annual free cash flow of $19 million (or $1.45 per share) to shareholders through a dividend. This would result in an implied valuation of approximately $20 per share. Meanwhile, the second option would generate more immediate value for shareholders that may exceed $20 per share.

“Mac-Gray's current share price of $11.79 is only 7% higher than its 1997 IPO price of $11.00,” said Fairview in its letter to the board. “How much longer must Mac-Gray shareholders endure low returns on their capital and a depressed share price?”

Clearly, Mac-Gray is facing several issues that it cannot solve without a serious change of strategy. A high-dividend payout model would increase its valuation by distributing some of its free cash flow to shareholders while a sale of the company would provide more immediate returns. Whether or not the company decides to take either action remains to be seen, but this is definitely a stock worth watching in the meantime!

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Smith & Wesson (NYSE:SWHC) shares fell 28% today hitting a new 52-week low after the company announced that its gun inventories were building up substantially as lower retail traffic caused a slow-down beginning in October. Many are attributing this slow-down to a drop in the U.S. crime rate, which fell as a percentage of the population from 2001 to 2006. Shareholders are clearly concerned that such trends may hurt the business in the future.

Smith & Wesson reported net product sales of $70.8 million for the quarter - an increase of 39.4% over the comparable quarter last year. Meanwhile, net income came in at $2.9 million, or $0.07 per share, which was $87,000 higher than the comparable quarter last year. The stock dropped on troubling comments that several manufacturers were forced to lower their prices on both long guns and hand guns in response as competition grows more fierce.

In the end, this is bad news for Smith & Wesson as well as other gun manufacturers that rely on a combination of hunting, protection and crime to drive their earnings growth. Combined, these factors make SWHC a stock worth watching!

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Axcan Pharma Inc. (NDAQ:AXCA) shares rose marginally today after 9.95% holder Pennant Capital Management said they were disappointed with the $23.35 per share buyout price by TPG Capital. Shareholders remain divided on the issue, however, given the fact that the M&A market has suffered a dramatic setback since the credit crunch, which has lowered valuations across the board.

"While we support selling the Company, we believe the valuation indicated is inadequate considering the strong cash flows of the business coupled with significant net cash on the balance sheet," said Alan Fournier, managing partner of Pennant. "We believe the company is worth at least $25 per share using a relatively conservative 8x EBITDA multiple which still results in a high single digit FCF yield."

Pennant also questioned the timing of the deal, pointing out that it was announced concurrently with very strong revenue and earnings report that, couple with guidance, likely would have driven a recovery in the stock price. The speculation is that the deal was announced so that the premium looked much more substantial than it would have reacted had they waited until after the earnings report.

In the end, Axcan is a great company that recently reported strong results. The buyout offer may be ill-timed and inadequate, but it does represent something that the company should carefully evaluate. The board should also work to disclose the details of the process and evaluation to allow shareholders to assess the fairness of the transaction. Combined, these factors make AXCA a stock worth watching!

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In a report today, the Mortgage Bankers Association said that delinquencies rose to over 5.5%, making them the highest they have been since 1986. Delinquencies, defined as being more than 30 days behind on mortgage payments, are seen as spelling future trouble for the housing market as many delinquencies turn into foreclosures, and an increase in foreclosures would further depress an already tough market for sellers.

Despite this news, the most prominent mortgage lender is up over 10% on the day. Countrywide Financial Corp. (NYSE: CFC), with a market capitalization of over $6 billion despite losing more than 80% of its value this year, is seen as being a major beneficiary of the recently announced federal plan to freeze the interest rates on some subprime mortgages as well as allow local governments to fund refinancing through tax-exempt bonds.

Both of these announcements are good news for Countrywide because it not only has significant mortgage portfolio holdings, which desperately need strengthening in the wake of rising foreclosures, but is also the major player in the mortgage origination industry and will greatly benefit from an increase in perceived housing market strength.

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United Rentals Inc. (NYSE:URI) shareholders may be in for a ride after SuttonBrook Capital Management disclosed a 5.83 percent stake in the company and announced that they may hold discussions with management, other shareholders or possible acquirers regarding a potential sale of the company. Many shareholders are still looking for an exit after the company's failed merger attempt with RAM Holdings (NDAQ:RAMR).

RAM Holdings and RAM Acquisition, subsidiaries of private equity giant Cerberus Capital Management, backed out of their planned $4 billion acquisition of United Rentals in November. United Rentals subsequently filed a lawsuit to force Cerberus to follow through with the buyout, since the firm gave no justifiable cause for terminating the deal. Cerberus contends, however, that they are only required to pay the $100 million breakup fee without reason.

SuttonBrook announced today that it would be in talks with interested parties regarding a possible merger, reorganization or liquidation of the company, sale of assets, material changes to the company's business structure, or changes in the board of directors, among other considerations. Many shareholders are hoping that other interested parties would be willing to make a bid or the company at or above the price that Cerberus was prepared to pay.

In the end, it is uncertain as to whether or not anything will become of this, but there are certainly many wildcards in play. Combined, these factors make URI a stock that is definitely worth watching over the next few months!

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It should come at no surprise that Fannie Mae (NYSE:FNM) has been loosing money, but just how much remains uncertain. The company's shares plummeted yesterday after it announced that it was cutting its quarterly dividend by 30 percent and raising $7 billion in new preferred securities after a strong reception to its previous offerings. Many investors are hunting for a bottom in this stock that has dropped nearly 50% during the past year.

Fannie Mae also announced today that it was expected to take credit losses of 8 to 10 basis points in 2008, compared to 4 to 6 basis points in 2007. The company said that 60% of its "seriously delinquent" loans have credit enhancement, based on the unpaid principal balance of the loans. The company also took the time to explain that the $7 billion offer yesterday will provide the company with a "capital cushion" over regulatory requirements in a "difficult market" and take advantage of select business growth opportunities.

The mortgage markets themselves remain in serious trouble as a significant number of subprime loans are expected to reset over the next 18 months. Many more near-prime loans are expected to do the same through 2010. It is important to note that all of these resets could cause further defaults, which could increase the number of homes on the market and lower prices. These lower prices then decrease the home equity the people rely on so much in the United States.

In the end, this problem is far from over and Fannie Mae may face further downside before it sees any significant upside. Regardless, this is definitely a stock to watch as once a bottom does it, there will be a great opportunity for profit!

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