Bring On the Takeovers

Eventually this market will bottom and credit markets will work properly again. Doug Kass makes a great case in his 20 predictions for this happening sooner than I expect. When sanity does return to the credit market, there will be a takeover boom -- one follows virtually every bear market and I expect this time to be no different.

An enormous amount of cash is already accumulating on the sidelines in private equity and activist funds as a result of this year's deleveraging and failure to get deals completed. Bloomberg reported yesterday that the current cash pile is the highest as a percentage of stock market value in more than 20 years. The falling market has created a lot of cheap assets and at some point this will trigger takeovers and restructurings that benefit long-term investors.

One way to search for the stocks likely to benefit starts with portfolios of activist investors with a successful track record. One of the best in the industry is James Mitarotonda of Barington Capital. Looking at its 13HF filing, Barington, like most investors, appears to have struggled somewhat in 2008. However it has been in the activist business since 1991 and has a long history of successful investments. It has a concentrated portfolio according to the filing and some of the pickings are ridiculously cheap.

Griffon Corporation (GFF - commentary - Cramer's Take) is a company I mentioned in February. Amazingly, the stock has held up pretty well and trades around the levels where it first came to my attention.

After shedding its installation services division this year, the company operates in three businesses. The electronics division sells support systems primarily for air traffic and communications. Specialty plastics manufactures and sells plastic films used in incontinence products, diapers and surgical gowns.

The real gem is Clopay, the largest manufacturer of garage doors in the country and the only publicly traded garage-door company I am aware of. In spite of a brutal market for retail sales and housing, the company has held up fairly well -- it posted a loss for the last quarter, but if you back out the goodwill write-offs, Clopay made money on an operating basis.

Griffon's stock is dirt cheap at 75% of book value and less than 10 times earnings. The balance sheet was refinanced earlier this year, with 29.5 million shares of stock sold in a rights offering. Management used some of the capital to buy back $34.5 million of convertible debt at a discount. The remainder will be used to either pay down debt or make opportunistic acquisitions to exploit low asset prices.

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At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.