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If you're a veteran investor, you know how important it is to closely follow a company once you've bought its stock.
Companies, you see, are a lot like living beings.
They don't feel or breathe. But they do grow – both in size and stature.
They can also get sick.
And some even die.
In a market as volatile and unpredictable as the one that faces us now, corporate fortunes can change quickly, and unexpectedly.
The opposite is true, too. Sometimes new profit catalysts emerge – quite unexpectedly.
Like the one we're going to look at today.
As an investment writer and an investor, I have a regimen I follow – and it works pretty well.
I usually set up an electronic "portfolio" (you can do this in Google Finance, and on other financial Websites, or you can do this in your online brokerage account). These are typically set up to deliver the latest headlines on each of the companies you've listed.
You can do some of the work yourself, too, checking newswire services such as The Associated Press and Reuters, Websites such as Bloomberg News, MarketWatch.com and Yahoo! Finance, and publications such as The Financial Times, The Economist and The Wall Street Journal.
It also pays to learn which trade journals or specialty publications follow your company.
As I learned during my years as a newspaper business journalist, the writers and editors at these publications develop a highly specialized knowledge of the industry they follow, as well as the individual companies in it.
If you think about it, these folks have to develop such an expertise: Their audiences tend to be experts themselves, meaning they'll be able to spot a phony or dilettante from 50,000 feet in the air.
This is What Caught My Eye Last Week
I mention this for a reason: Last week I began to see some interesting – and potentially profitable – new developments that relate to EMC Corp. (NYSE: EMC), the data-security and storage giant that I recommended on June 29 to Private Briefing subscribers in a report entitled "Grab This 50% Payday From the Shrewdest Player in Tech."
Let me show you what I've seen. And then we'll come back and look at these developments in more detail.
The news items and other notes that were reported include:
- An uptick in options volume and a rising put/call ratio – an indication that investors are expecting the stock to move, and that a growing number are worried this move will be down.
- EMC President Pat Gelsinger will become CEO of VMware Inc. (Nasdaq: VMW), the fast-growing software venture controlled by EMC. Gelsinger will replace Paul Maritz, the VMware CEO who was responsible for the software-virtualization company's dramatic revenue growth. Maritz will become chief strategist for EMC.
- EMC has spent $19.994 million to purchase a total of 241,818 VMwares shares at the total value of $19,994,019. Since June 28, EMC has purchased roughly 361,000 VMware shares – with no sales.
- EMC and VMware are looking to take all of their cloud-computing-related businesses and spin them off into a new company.
If you look at these, you'll see that I went to different places to obtain each bit of research. In fact, I haven't seen all of this research in one spot anywhere. In my view, that makes this combined intelligence much more valuable.
That's why, as an individual investor, you need to do the research – no one will do it for you (well, except for us, of course).
What does this all mean?
As I wrote this, the company wasn't commenting on the speculation of a spinoff. But the spinoff deal could unlock a lot of value for the stockholders of EMC and VMware.
So let's get a head start on the rest of the crowd, and start thinking about what could be happening here.
Let's start with the executive swap.
As a precursor to the spinoff, it's possible that EMC wants to more fully integrate VMware into its other businesses, and wants an exec in place who can manage such a transition and then align the two companies for maximum profit. Though Maritz is highly regarded by investors, so is the new exec Gelsinger.
A spinoff would mean the cloud-computing venture – the fastest-growing business opportunity each company has – would get to operate as a standalone venture.
If well-managed, and if current investors received a piece of the new company, that could be very bullish.
As a standalone venture, the EMC/VMware cloud-computing business would be better positioned to compete with the rival ventures run by Google Inc. (Nasdaq: GOOG) and Amazon.com Inc. (Nasdaq: AMZN), to name a few.
And as we noted in our June 13 Private Briefing about spinoffs ("Two Companies for the Price of One"), this is also a transaction that should unlock value for shareholders of both EMC and VMware.
Even better: Others are starting to see the same potential.
In a new report, Trefis, one of the sharper investment researchers we've found, just posted a new price estimate for EMC shares that it says "is significantly higher than the current market price."
That's an understatement, if I ever saw one. The Trefis target price for EMC is $45.55 – which is 82% above current levels.
Trefis researchers concur with our assessment that there is a lot of potential for the spinoff venture, noting that "companies are likely to spend close to $207 billion a year (emphasis ours) on cloud services and this is a major growth opportunity for EMC-VMware. Currently the market leaders in cloud services areAmazon Web Services, Google Compute Cloud and Microsoft Cloud Services, and the spin-off is likely to be made to focus on this big market. A major chunk of this market is likely to be Big Data Analytics and the [EMC/VMware venture] may be a major player in this space."
I'm willing to bet we'll know more shortly: VMware is scheduled to release its full quarterly earnings today after the bell, followed by EMC tomorrow.
Until then, we'll keep watching. And you should too.
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.