Special Situation Stocks

Special situation stocks are often takeover targets, turnarounds, deep value stocks, and many other situations that make investing in these companies "special". In-depth research can give investors an edge into special situation stocks that have the potential for large gains. Takeover targets often see their stocks surge in value. Turnarounds often involve investing in companies that face challenges and successful ones can lead to gains of 200% to 1000% or more over the long run. Deep value stocks usually require a contrarian mindset to buy stocks in companies that have fallen out of favor. Investors like Warren Buffet have been strong advocates of value investing and the returns he has made by investing in value stocks prove that this is one of the best long-term strategies.

Wells-Gardner Electronics Corp. (WGA) designs and manufactures LCD flat panel displays, monitors and also makes and distributes parts for gaming machines used at many casinos. This company could see explosive growth later this year when it begins supplying video lottery machines to states like Illinois which recently passed laws that allow for this new form of gaming. Many states are seeking to increase tax revenues and gaming is one solution. Based on projections from Wells-Gardner, this new source of revenue could nearly double annual revenues for this company. That could turn this bargain value stock into a growth stock, with a much higher share price.

Catalysts: Major revenue growth potential when the company begins filling orders related to the newly legislated video lottery terminals in Illinois. The company could also be a takeover target.
52 week range: $1.69 to $2.52
12 Month Target Price: $5 Long Term Target Price: $6.50

Mueller Water Products, Inc. (MWA) is a leading manufacturer of water infrastructure products. Mueller has been in business for over 150 years and markets products under three brand divisions: Mueller Co. (tools and parts for water infrastructure projects), Anvil International (couplings, fittings, flanges and valves, etc.) and U.S. Pipe (iron pipe, fittings, and other products for the water and wastewater industries). This company pays a dividend of 7 cents per share which provides a yield of 3.3%. This company has annual revenues of about $1.3 billion and a book value of $2.45 per share. Revenues have been impacted by the recession since many municipalities have slashed their budgets. However, water infrastructure needs to be replaced and maintained eventually, so these expenses can only be deferred for awhile, and one day demand should rebound. Mueller has raised prices and also reduced expenses in order to boost profit margins. Multiple insiders purchased nearly 100,000 shares in August, 2011. Mueller stock has also attracted the interests of hedge fund billionaire David Tepper who owns a large stake (just over 10 million shares, or about 7% of the company) through the Appaloosa Management Fund he founded. David Tepper specializes in distressed assets and he famously made billions of dollars for himself and his fund in 2009 when he bought deeply depressed stocks. This company could be a takeover target and it is currently working with Merrill Lynch regarding options to possibly sell its U.S. Pipe division. The two other divisions are solidly profitable so if the company sold U.S. Pipe, it would remove a drag on financial results. This stock looks attractive on dips below $2.20.

Catalysts: The sale of the U.S. Pipe division, and/or a takeover of the entire company would result in big gains for shareholders.

52 week range: $1.94 to $4.80

12 Month Target Price: $4 Long-Term Target Price: $6.50

Genworth Financial (GNW) provides a variety of insurance and other financial products including life insurance, long-term care, Medicare supplement insurance products, annuities and mortgage insurance. This company has a solid balance sheet and annual revenue of about $10.3 billion. The mortgage insurance business at Genworth has impacted overall results for the company and this trend is likely to continue for at least 2 more years. The market has not been favorable for financial companies like Genworth, especially since it has ongoing exposure to the weak housing market. However, in all this negativity there is opportunity for long-term investors because the stock appears to be a bargain. The life and long-term care insurance side of the business remains stable and can probably allow Genworth to continue reporting profits even with mortgage losses. When the housing market improves, profits should surge. Buying this stock on dips below $6 will probably payoff nicely in a couple of years.

Catalysts: A general improvement in the housing market, the economy, and the stock market would all significantly boost this stock.

52 week range: $4.80 to $14.77

12 Month Target Price: $9 Long-Term Target Price: $16

Ford Motor Company (F) is a leading automaker with Ford, Lincoln, and Mercury brands. Alan Mulally is the CEO of Ford and he has led a turnaround which continues to progress on all fronts. Before serving as CEO at Ford, Mulally served as President and CEO of Boeing Commercial Airplanes. Ford has been introducing new models that are popular with consumers, well designed and fuel efficient. Progress is being made on the financials and profits have been rising. Both S&P and Fitch have upgraded Ford's corporate rating to just below investment grade. Unlike other automakers, Ford did not take bailout funds from the U.S. Government. This stock looks like a bargain on dips below $10.50 for longer term investors.

Catalysts: Economic growth and reduced unemployment would boost profits. Ford could also announce a dividend in 2012.

52 week range: $9.05 to $18.97

12 Month Target Price: $15 Long-Term Target Price: $20