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Y L F M A E T Team-Fly® FM 7/9/01 8:43 AM Page i THE SUPERSTOCK INVESTOR This page intentionally left blank. FM 7/9/01 8:43 AM Page iii THE SUPERSTOCK INVESTOR Profiting from Wall Street’s Best Undervalued Companies Charles M. LaLoggia Cherrie A. Mahon McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto McGraw-Hill abc Copyright © 2001 by the McGraw-Hill Companies Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-138116-3 The material in this eBook also appears in the print version of this title: 0-07-136083-2 All trademarks are trademarks of their respective owners. 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DOI: 10.1036/0071381163 FM 7/9/01 8:43 AM Page v CONTENTS ACKNOWLEDGMENTS ix INTRODUCTION 1 PART ONE THE MAKING OF A SUPERSTOCK INVESTOR Chapter One A Defining Moment 11 Chapter Two A Superstock Is Born 15 Chapter Three Stock Selection 19 Chapter Four Investing Paradigms: A New Way of Thinking about Stock Selection 25 Chapter Five The Twilight of Index Investing 31 Chapter Six Experts: What Do They Know? 35 Case Study: Sunbeam 46 Chapter Seven What Is Value? 57 v Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use. FM 7/9/01 8:43 AM Page vi vi CONTENTS Chapter Eight If Everybody Knows Everything, Then Nobody Knows Anything 65 PART TWO IDENTIFYING TAKEOVER TARGETS Chapter Nine Creeping Takeovers 77 Case Study: How Rexel S.A. Acquired Rexel Inc. 78 Case Study: The Takeover of ADT 85 Chapter Ten How to Create Your Own “Research Universe” of Takeover Candidates—The Telltale Signs 95 Case Study: Spotting Brylane as a Takeover Target 106 Case Study: Sam Heyman and Dexter Corp. 111 Chapter Eleven How to Use the Financial Press 125 Case Study: The Triple Play and Midway Games 140 Chapter Twelve Family Feuds 149 Case Study: Copley Pharmaceuticals 149 PART THREE TAKEOVER CLUES Chapter Thirteen “Beneficial Owner” Buying 159 Case Study: Sumner Redstone and WMS Industries 159 FM 7/9/01 8:43 AM Page vii CONTENTS vii Chapter Fourteen The “Pure Play” and the Drugstore Industry 187 Case Study: Fay’s and Genovese 190 Case Study: Smith Food & Drug Centers 201 Chapter Fifteen Using Charts 205 Case Study: Salick Health Care 207 Case Study: Rohr, Inc. 210 Chapter Sixteen The Domino Effect 215 Case Study: Vivra and Ren-Corp. USA 215 Case Study: Renal Treatment Centers 219 Chapter Seventeen Merger Mania: Take the Money and Run 223 Case Study: JCPenney and Rite Aid 233 Case Study: The Alarming Story of Protection One 238 Case Study: How Mattel Got Played by The Learning Company 247 Case Study: Waste Management and Allied Waste Industries 251 Chapter Eighteen Look for Multiple Telltale Signs 259 Case Study: Sugen, Inc. 260 Case Study: Frontier Corp. 266 Case Study: Water Utilities 271 APPENDIX: A SUPERSTOCK SHOPPING LIST 285 RESOURCES 295 INDEX 297 This page intentionally left blank. FM 7/9/01 8:43 AM Page ix ACKNOWLEDGMENTS I would like to thank the person who inspired this book and with- out whom it would not have been written: my friend, my business partner, and Director of Research, Cherrie Mahon. This book was actually born when I met Cherrie in 1998. She was a stockbroker at the time and was endlessly inquisitive about my newsletter, research techniques, and rather unusual approach to stock selection in com- parison to what she was learning at the major “mainstream” bro- kerage firm that employed her. She seemed to recognize that my way of thinking was different from anything she had been exposed to, and her constant search for answers forced me, for the first time, to think about and explain, in detail, the thought processes that went into the recommendations in the newsletter. In a way, Cherrie’s inter- rogating and seemingly endless curiosity forced me to turn an approach that had been based mostly on instinct and experience into an understandable and, I hope, instructive set of principles and guidelines that can be used by any investor willing to take the time and effort to learn how to use them. Obviously, I have done a lot of writing over the years, but writ- ing a book is different. If it were not for Cherrie, this book would not have been born—and if it were not for Cherrie, I probably never would have had the determination to complete it. Her support throughout this process was invaluable. Charles M. LaLoggia ix Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use. This page intentionally left blank. Y L F M A E T Team-Fly® Introduction 7/9/01 8:44 AM Page 1 Introduction If you’d been born in a cave and had lived there your entire life, with no knowledge of radio or television signals, you would prob- ably be skeptical if someone were to tell you the air waves were filled with conversation, political commentary, advice for the lovelorn, hot stock tips, music, and even pictures. Of course, without a radio or television you would not be aware of the existence of such signals. The signals would be all around you, but you’d be oblivious to them without the means to pick them up. Similarly, if you are accustomed to a certain way of reading the financial news, you can pick up “signals” that a certain stock that seemingly has nothing much going for it will soon rise dramatical- ly in price. Why? Because something is about to happen which will literally force the stock market to recognize that stock’s true value. I call such stocks “superstocks,” because they can leap above any kind of market in a single bound. I began publishing my stock market newsletter as The CML Investment Letter—currently named Superstock Investor—in December 1974. Along the way I developed a reputation for being able to spot neglected companies that were about to become stock market stars— not because they suddenly became supergrowth companies or had developed a ground-breaking new technology, but because some- thing was about to happen that would send that stock price to a much higher level that better reflected that company’s value as a business. Usually, that “something”—an outside event, or what I call a “catalyst”—had the effect of pushing the stock price higher in one sudden jump rather than gradually over time. Seemingly, that 1 Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use. Introduction 7/9/01 8:44 AM Page 2 2 INTRODUCTION outside event came out of the blue.