NEW YORK (TheStreet) -- Earlier this week, I wrote a piece on the record level mergers and acquisitions activity we're seeing in the biotech space this year. That activity creates tremendous opportunities to participate in beaten-down stocks that can be bought for huge premiums.
And there is another beaten-down sector where M&A activity is heating up. It's retail.
This week, two activist hedge funds with a stake in Ann Taylor (ANN) argued the company should be sold. They stated the stock should be worth $50 to $55 on a buyout. That would be a 20% to 30% premium to where the shares trade today.
Last month, Sycamore Partners, the billion dollar private equity-hedge fund firm, said they initiated a nearly 10% stake in Express (EXPR) . They wrote a letter to the company indicating that they had interest in acquiring the entire company. Public-to-private takeouts typically come with a nice 20% to 40% premium in share values to get shareholders on board.
And then there's Chico's (FAS) , another retail apparel company. They said they were exploring a sale of their company, potentially teaming up with a private equity firm to take their company private. This news sent the stock up almost 10% in one day.
With brand name quality retailers selling at multi-year lows and, at distressed valuations, we think retail M&A is primed for a boom.
At BillionairesPortfolio.com, we've identified potential takeover candidates in retail by looking at the most distressed stocks where there is a presence of a big influential shareholder. Many times a shareholder with a controlling stake in an undervalued company and a history of activism will become the catalyst for a sale of the company.
Using these criteria, we have found a list of seven retail stocks that either: 1) have the potential to be acquired for a big premium, or 2) present a rich turnaround opportunity. Each are heavily owned by a top hedge fund, private equity firm or billionaire investor.
1) Wet Seal (WTSL) -- Wet Seal stock has huge upside potential with very limited downside risk. The company has 65 cents in cash per share and sells for just 90 cents. That means the company has almost as much cash on its balance sheet as it entire market capitalization. In addition, it's owned by activist billion dollar hedge fund, the Clinton Group. This investor has recently stated in writing that if Wet Seal gets cheap enough, they would have no problem buying the company outright at a significant premium.
2) Aeropostale (ARO) -- Billionaire private equity-hedge fund Sycamore Partners, the one who just recently announced their intention to buy Express, owns more than 12% of Aeropostale through stock and warrants. Furthermore, Sycamore just loaned Aeropostale $150 million in cash. They have a history of acquiring companies at a huge premium after making an initial investment, such as Talbots and Hot Topic.
3) Destination XL Group (DXLG) -- Private equity-hedge fund firm Red Mountain Capital Partners owns a whopping 15% of Destination XL Group. The fund has been adding to its position over the past month.
6) RadioShack (RSH) -- Top performing billion-dollar distressed hedge fund, Litespeed Partners owns nearly 10% of RadioShack stock. RadioShack has the classic asymmetric risk/reward. The stock has big upside, with defined downside risk. RadioShack is selling at an all-time historical low. The worst case scenario is zero. On a turnaround, however, the stock could easily sell for 300% to 400% higher than current levels. In this stock, you have a partner on your side.
7) Sears Hometown and Outlet Stores (SHOS) -- Famous value investor and billionaire Eddie Lampert. Lampert, through his hedge fund RBS Partners, owns an incredible 25% of this stock. Even better, Lampert has been personally buying millions of dollars worth of Sears stock this month, even as it sits near its 52-week low of $20.
At the time of publication, subscribers of BillionairesPortfolio.com own ARO and WTSL, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates RADIOSHACK CORP as a Sell with a ratings score of D-. TheStreet Ratings Team has this to say about their recommendation:
"We rate RADIOSHACK CORP (RSH) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself."
- You can view the full analysis from the report here: RSH Ratings Report