Imminent Catalysts Could Send These 3 Stocks Higher

February 21, 2013

Here at StreetAuthority, we’re big fans of a theme known as “catalyst investing.” Though many stocks vie for investors’ attention, only a few of them are on the cusp of near-term events that can lead to a quick spike in the share price. Here are three stocks with potentially major catalysts in place.

1. Arkansas Best

I’ve been tracking the prospects for Arkansas Best (Nasdaq: ABFS) on several occasions, most recently noting that the trucking firm’s stock looked like a deep bargain, trading at just two-thirds of book value. After an impressive rally, shares have zoomed back up to a book value of $300 million, with a looming catalyst that may take shares higher.

By the end of March, this stock could move even higher. That’s when its current contract with 7,500 drivers comes to an end. Arkansas Best’s current contract is currently out of line with the rest of the industry, and management has made it clear it’s prepared to walk away from contract negotiations if the labor union that represents these drivers doesn’t agree to more favorable terms. Rivals such as Con-Way (NYSE: CNW) and YRC Worldwide (Nasdaq: YRCW) have already secured a deep level of concessions from the union, and Arkansas Best simply wants the same deal.

Merrill Lynch frames the company’s position in clear terms: “Either an agreement is reached reducing pay rates for union employees before the March 31 expiration of its contract or management noted it will make extensive network changes, including closing terminals and distribution centers.” Either choice would lead to higher levels of profitability for the company, which is why Merrill’s analysts now see this stock rising nearly 22% to $14.

That target price reflects a still-weak view for the trucking industry’s pricing dynamics. But if the economy strengthens during the next few years, and freight volumes and pricing rebound, then there’s no reason this stock can’t start rising back toward the $35-per-share mark, where it stood before the economy slowed.

2. Gafisa

Nearly a year ago, I recommended shares of Brazilian homebuilder Gafisa (NYSE: GFA) and though shares soon stumbled, they have rallied back to where they stood in April 2012. Yet what I wrote then still stands: New household formation in Brazil is quite robust (around 1.7 million per year), and analysts expect the Brazilian housing market to strengthen in advance of the 2014 World Cup and the 2016 Olympics.

Yet there’s another catalyst in place: Gafisa is looking at selling some or all of its stake in Alphaville, a builder of urban housing that has remained quite profitable for Gafisa, even as other divisions have slumped.

Alphaville generates profit margins of more than 30% and has posted a return on equity (ROE) in excess of 40% in recent quarters. These kinds of metrics would set the stage for a well-received initial public offering. Gafisa also could look to bring in cash by selling a stake in Alphaville. Management has been huddling with investment bankers for nearly six months and is expected to announce its plans for Alphaville in the next few months.

3. Tivo

Roughly five months ago, I laid out a series of litigation-based catalysts that could move Tivo (Nasdaq: TIVO) higher, and shares have since rallied 40%. There are two more of these stock-inducing events that still lay ahead.

Recall that Tivo already has secured more than $1 billion in legal victories for patent infringement against companies like DISH Network (Nasdaq: DISH), AT&T (NYSE: T) and Verizon (NYSE: VZ). (Notably, Tivo also will be collecting $100 million in annual royalties during the next five years.)

Now, Tivo is getting set to go to trial with Motorola Mobility (a division of Google (Nasdaq: GOOG)) and Cisco Systems (Nasdaq: CSCO). The Motorola case heads into pretrial hearings in mid-April, with jury selection set for May 6. The Cisco case will have its Markman hearing in July, with a trial planned for early 2014.

Yet here’s why you shouldn’t be waiting for those events to play out: In its previous lawsuits, Tivo agreed to settle out of court, so the company will likely pursue a similar outcome in these lawsuits to save on litigation expense.

What are the chances Tivo will secure favorable terms in a settlement?

“The patents in question in the Motorola and Cisco cases are largely similar to the patents that were at the center of the DISH, AT&T and Verizon cases. Moreover, AT&T and Verizon had implementations that involved Motorola set-top-boxes,” noted analysts at Goldman Sachs. In other words, Tivo holds a strong hand in these cases.

We may see action on the legal front in coming weeks. Tivo will report quarterly results on Tuesday, Feb. 26, and investors will be listening closely to see whether these two catalysts are about to come into play.

Risks to Consider: Share prices for these firms partially reflect a positive outcome from these catalysts, so if they don’t come to pass, then shares could pull back.

Action to Take –> Notably, all three of these stocks appear attractive even without these catalysts. Arkansas Best should benefit from a cyclical upturn in the trucking industry, Gafisa is poised to benefit from a robust new household formation in Brazil and Tivo’s core business of DVR-style software and hardware continues to see increasing adoption among global cable providers. These stocks clearly hold great appeal and the realization of these catalysts simply would boost the speed in which they appreciate.

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