As I write this, Congress is fighting and playing political games over the Federal debt ceiling limits. And Secretary of the Treasury Janet Yellen was on Capitol Hill this week saying that if the situation is not resolved, the Treasury is going to be out of options by mid-October, which would lead to the first-ever default of United States debt.
Even if it’s only a temporary default, that would be a political and economic disaster. Interest rates will spike if that happens, and that would make the overall cost of financing the massive nearly $30 trillion of debt skyrocket.
So, there are a lot of implications for this, none of which are positive for the markets.
Now, we have talked in the past about having a Black Swan strategy in place, and if you implemented that while volatility was low, then you’re positioned extremely well. If you own the community banks I talk about, then you should also be in great shape.
But if you’ve got new money to put to work, I suggest limiting ourselves to special situations where we believe that the stock or investment in question is going to go up no matter what the stock market does.
One way to find that kind of stock is to look for smaller companies where activist investors have taken a big position and are pushing for the sale of the company.
These stocks are usually already beaten up and institutions have lost interest in them, and if the activist is successful at forcing the sale, it should happen at a much higher price. That should provide investors with a very nice profit regardless of what the stock market does.
I have two stocks that fit that description today…
The first is Psychemedics Corporation (PMD), which makes drug testing kits. I noticed recently that an activist investor named Peter Kamin has taken a large position in the stock.
He was a founder and managing director of ValueAct Capital, one of the best activist investing firms of all time, and he currently runs 3K Limited Partnership. He owns 8.4% of the company and recently sent a letter to the board suggesting that the CEO has not been running the company as well as possible.
Kamin thinks that the board is wildly overcompensated given how little they actually put in to overseeing the company, and he is agitating aggressively for the company to hire a competent investment banker and put itself up for sale immediately.
He has the contacts among other shareholders and the respect of the institutional community. He could easily force the sale of PMD, and there are surely a long list of potential interested buyers out there.
I think there is a fairly high probability that this deal gets done, and I don’t think that a market collapse would impact the stock very much. And if we see a sale of the company, we could see gains of 50% or more very quickly.
Now, the next company I want to talk about today is AMREP Corporation (AXR), which owns about 18,000 acres in New Mexico. They sell developed and undeveloped lots to real estate developers and investors in the area, and it’s been a pretty good business.
They also have some land in Colorado as well as a 143,000 square foot warehouse in Florida, so they’ve got a nice mix of real estate assets, and the market is paying no attention to this company.
However, an activist investor named James Dahl has taken notice. He is the founder and former chairman of Rock Creek Capital and also served on Florida’s state pension board. He has now bought 8.3% of AXR, and he wants it to list itself for sale because he thinks it is badly undervalued based on the land holdings compared to the stock price.
I love this situation because it’s a smaller company, and no one is paying any attention to it. Not much is going to happen to it in a bad market, and I think the company is worth at least twice the current stock price.
With the demand for real estate going up, this stock could keep going higher and eventually be sold at an even higher price sometime in the next 12 months.
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