- - Thursday, August 18, 2011

ANALYSIS/OPINION:

Volatility has been the name of the game the last several trading days. The driver you ask? The same as it has been over the last several weeks — namely ongoing sovereign debt concerns and a slowing economy.

Whats different this time is we are no longer talking about Greece but rather Spain, France and Italy, and the slowing economy is not just in the U.S. but also in Europe. It seems that the economy and subsequently the stock market cant catch a break as we move from one crisis in confidence to the next. As a result of this latest rash of negative news, the S&P 500 is down more than 9 percent for the year with nearly all of that drop having come since July 22.

As I have said many times, while the stock market is forward-looking in nature it abhors uncertainty and that is the one consistent thing we have been getting when it comes to the global economy, recent corporate earnings and politics.

While it’s easy to fall into the doom and gloom as we look at the overall market indexes, we have to remember that there is nearly always a bull market out there from an industry or two and a select group of companies.

In March 2010, I wrote about the growing importance of intellectual property rights (IP) in the mobile and smart-phone industry. One of my thoughts at the time was the shift from a passive to a more-active IP business model would result in a sharp rise in patent lawsuits. As the saying goes, its better to be early than wrong and even casual readers of this column know the thematic nature of the way I look at industries and companies tends to have a longer investment horizon than most.

A few months ago Apple, Microsoft, Research in Motion, LM Ericsson and EMC successfully bid on Nortel Networks Corp. patent pool to the tune of $4.5 billion. Having lost out on that bid and being patent deficient, Google announced earlier this week said it would acquire Motorola Mobility Holdings for $12.5 billion. For that price, Google will get Motorolas challenged device business and set-top-box business, and also its patent war chest. Motorola Mobility shares rocketed to $38 on Monday after that surprise takeover bid; those same Motorola shares closed last week at $24.47.

As a result of those two transactions, other companies are now looking to put themselves on the auction block. In late July and following the higher-than-expected bid for Nortels patents, the InterDigital board announced it would be exploring strategic alternatives. Company shares quickly jumped from $41.51 and have been trading between $64 and $70 over the last several days. Another was Eastman Kodak, which announced the intent to sell either the entire company or its patent portfolio. That news has Eastman Kodak shares up double digits in an overall stock market that is down more than 5 percent as of Thursday afternoon.

Sounds great, but not every company that thinks it should be acquired will be. And for those that arent, there can be a painful return to stock-price reality once the takeover euphoria fades. Consider the shares of Big Lots. In early February the Big Lots management announced it was looking for strategic choices and Big Lots shares climbed on that news. In mid-May, the company said it was not up for sale and that weighed heavily on the shares resulting in a 17 percent drop.

Investing in potential takeout candidates can offer significant rewards, but it is risky. To mitigate that risk, be sure to understand an industrys pain points as well as what the competitive and strategic gaps are at key players in order to help your selection process.

Good hunting and buckle up if you take that route.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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