Special Situation Ideas for week of 3-December-2012

Water:

In a thematic writeup which I usually don’t do, I stated that “Water” is one of my favorite sectors. US water infrastructure is aging. What’s further exacerbating the situation is the current extreme weather conditions. According to what I read online, the U.S. EPA has estimated that 250K watermain breaks occur each year in the nation, with up to 70K-75K sewer overflows annually, discharging up to 10bn -11bn gallons of untreated wastewater. Sewer cost, water cost and investment in infrastructure are slated to increase in the US alone by more than USD 1T, before 2035. Bloomberg article has other statistics. One of the main beneficiaries of this tread is a name I wrote about a while ago, Xylem (XYL). Other names worthy to look into are : Pentair (PNR), Flowserve (FLS) and Aegion (AEGN).

Activism:

I wrote a long on Tessera Technologies(TSRA). It might be worth another look. According to BArrons 13D monitor, Starboard declareda 5.7% stake in TSRA. The fund has had particular activist success in companies that have solid core businesses with significant cash flow, but management that reinvests the cash in noncore unsuccessful businesses. Starboard is likely to nominate directors for the next annual meeting and ask for a breakup.

Another three stocks I read about:
Celanese (CE) is a diversified company. Its biggest segment is acetic acid, which is suffering from weak global demand. The stock is around $40 and trades for 9x 203 earnings. Once the global economy recovers, CE can increase its EPS from $2.75 a share to over $5 a share. Catalyst: CE has developed a process that can make ethanol from natural gas and coal. The cost is substantially below the cost of making ethanol from corn. The first commercial plant will open in China in 3Q13 and will make both industrial and fuel ethanol. If the U.S. changes its policy which currently requires that ethanol be made from corn, then it can be a huge game changer. (Barrons)

AerCap (AER) buys planes from Boeing and Airbus and leases them to airlines. The leases typically run for well over a decade. The credit quality of leases is good. The stock trades around $12.50, which is 70% of its tangible book value of just over $18. Its also trading at just 6x forward earnings. The firm does not pay any dividend; however, they bought back 18.5% of its stock over the last 1.5years. t ultimately could get sold to a large financial-services company with low-cost funding. (Barrons)

NetScout Systems(NTCT): The firm develops and sells network performance management and service assurance solutions for high speed networks. End clients ma include commercial enterprises, governmental agencies and telecommunication service. Trades at P/E of 20x, reported YoY growth in EPS of 12%; 20% Operating Margin; $230M in cash and only $69M in debt. With the networks inundated with demand for data, and the ongoing digital revoltion, the firms product might see incremental demand going forward. This firm in addition to reporting increased demand for its products might also become a takeover target.