In Praise of the Break-Up

 | Feb 21, 2014 | 5:30 PM EST
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Sometimes there is utter foolishness and people simply don't get what's occurring in a stock.

In Get Rich Carefully I acknowledge that there are two kinds of self-help that management can bring about: making acquisitions, like Actavis (ACT) buying Forest Labs (FRX), or splitting a company to bring out value.

The former brings instant success -- think of American Airlines (AAL) -- while the latter is chronically misunderstood by the marketplace. Yet, as I show in "Get Rich Carefully," the results can be amazing, including the single-best creator of wealth, the break-up of the old Phillip Morris. But there are many others, including the break-up of some of the oil companies and the split-up of Fortune Brands.

In each case, there was an initial level of rumor in the story that produced a rally, then the actual announcement of a split that produced another rise, then the actual split, and finally the aftermarket run as new management focused on creating value. I documented dozens of these before including them in the book. Right now, the optimism you see in Merck (MRK) is all about the leadoff to the restructuring and spinoff, and it is one the book predicted early on.

But three of these current break-up situations, owned by Action Alerts PLUS, have no yet reached the fruition that I believe will ultimately occur: National Oilwell Varco (NOV), Occidental Petroleum (OXY) and Timken (TKR). All three are taking extraordinary actions, and while the run-up to the actions and the announcements produced good gains, those gains have either evaporated or been consolidated.

Nevertheless, as I found in my study, the best is yet to come. OXY is spinning off its prized California possessions which are, by far, the best left in the country to exploit. Timken is splitting into a virtual commodity company as well as a highly value-added steel company. That will be just the beginning of the big vault. National Oilwell is the most mystifying, though. This stock has done nothing since the announcement and is now going down. That's illogical, and I bring it to your attention simply because it will only be a matter of time before you see the real value come to the fore.

I have played these previous breakups whenever possible, and they have been among my most successful holdings. I believe that NOV, TKR and OXY will be in that pantheon when all is said and done.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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