Happiness Is Being Ahead of the Curve

NEW YORK (TheStreet) -- One of the potential benefits of value investing is that you can sometimes be ahead of the curve; discovering and identifying out-of-favor names before the markets discover that there's value there. That's the objective.

This often means buying companies that have a compelling array of assets, but that also may have a "flea" or two. The fleas are what keep other investors away, but sometimes these negatives are either fixable or cause severe overreactions, pushing stock prices below reasonable value.

In the past year, I've had a couple of names in my portfolio acquired. Force Protection ( FRPT), a small manufacturer of military vehicles, was acquired last November by General Dynamics ( GD). Force had a very clean, cash-rich balance sheet and, at times, traded very close to its net current asset value. General Dynamics got it on the cheap at $5.50 a share. Then in March, auto repair name Midas ( MDS) was acquired by TBC. Midas was real estate rich, owning a number of its store location, but was not delivering great operating results. TBC, in my opinion, got a great deal at $11.50 a share.

It does not always work. I owned Callaway Golf ( ELY), a former high flying name that fell on tough times, for a few years with the belief that it would make a nice brand acquisition for one of the bigger names. Unfortunately, the company's "recovery" continues to be pushed out farther into the future and, despite a decent balance sheet, there's been no interest (that I'm aware of, anyway). That's a name I finally gave up on.

Fast food name Wendy's ( WEN) was also a disappointment, unable to show much operating progress in the past couple of years. For a time, I thought that the company might be taken private, but other than rumors, nothing else materialized. I threw in the towel here, too.

I still believe that Krispy Kreme ( KKD) would make a nice target for a bigger fish trying to expand its portfolio of brands. This company has experienced a solid turnaround in recent years, yet the company's enterprise value is still around $500 million.

Small casual dining chain Cosi ( COSI) has had its share of issues over the years, namely that it finally had a profitable quarter after 10 years as a public company. Several months ago, after seeing an interview that Jim Cramer did with Panera Bread's ( PNRA) CEO, it occurred to me that Cosi might make a cheap acquisition for the company, which has been public about its interest in acquiring other chains. Cosi's recent rights offering has quelled that hope, for now anyway.

I'll also sometimes look at companies when deals have gone sour. In late May, Gores Group walked away from its $15 a share deal to acquire auto repair and retail name Pep Boys ( PBY), which I've owned in the past.

Like Midas, Pep Boys is also real estate rich, but Gores was scared away due to questionable operating performance. For its trouble Pep Boys walked away with a $50 million breakup fee. Shares are now trading 33% below Gores takeout price, and very near tangible book value. Pep Boys may have some challenges in front of it, but I am intrigued by the fact that it owns the real estate for 232 locations, and four warehouses (1.4 million square feet). Some fleas, yes, but one I'm watching.

At the time of publication, the author was long KKD and COSI.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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