Topic: Daily Advice

Stock market picks: Maple Leaf Foods’ hidden value could mean big gains lie ahead

On Thursday, October 29, two directors of Maple Leaf Foods Inc. (symbol MFI on Toronto) from the Ontario Teachers’ Pension Plan resigned their positions.

Maple Leaf is Canada’s largest food processor. It sells most of its products, which include fresh and prepared meats and poultry, under the Maple Leaf and Schneider brands. The company is one of the stock market picks we’ve long recommended in our Successful Investor newsletter.

Expiration of shareholders’ agreement brought big changes to Maple Leaf Foods

Until June 30, 2010, Teachers agreed to vote its 35.5% interest in Maple Leaf Foods with the McCain family’s 37.7% stake to prevent any potential takeover.

It’s understandable why Teachers wanted to be free to support takeover proposals that the McCain family opposes. After the McCain family and Teachers took over the company in 1995, the stock market pick’s shares moved up from $6 to $23. Since then, its stock price has had a series of rallies that each lasted a year or two, but eventually petered out.

Teachers recently sold some of its shares to private equity fund West Face Capital Inc. West Face now owns about 11% of Maple Leaf Foods. The pension plan will hold on to its remaining 25.2% stake for now.

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Hedge fund’s involvement could help unlock this stock market pick’s value

West Face has a long history of helping companies unlock hidden value. In Maple Leaf’s case, a key hidden asset is the company’s Canada Bread stake, which is worth around $7.45 per Maple Leaf share.

If Maple Leaf were to sell Canada Bread, or hand it out to Maple Leaf investors as a special dividend, its investors would still own Maple Leaf’s meat-processing operations, but their cost would go down to just $5.25 a share (the current $12.70 price of a Maple Leaf share, minus the $7.45 value of the Canada Bread share).

This would give Maple Leaf shareholders some free leverage. Further gains in the meat business would have a bigger percentage impact on the stock market pick’s shares, simply because Maple Leaf would cost less to own.

Even if Maple Leaf decides to hang on to Canada Bread, and if it continues to make progress with its meat business, today’s Maple Leaf buyers are still likely to make some money. The prospect of West Face accelerating the pace of change at the company only adds to its appeal.

The best of all investment worlds

Sometimes, of course, hidden assets stay hidden for a lengthy period. But as long as a stock has more obvious appeal, such as long-term growth prospects, a reasonable price-to-earnings ratio or an attractive dividend yield, you have what we call the best of all possible investment worlds: a heads-you-win, tails-you-break-even situation.

Maple Leaf is a real-life example. You rarely lose much in a deal like this, but if it works out well, it can be extraordinarily profitable.

We’ll continue to monitor the changing situation at Maple Leaf, and update our buy/sell/hold advice accordingly, in The Successful Investor. What’s more, you can get the latest issue free when you subscribe today. Click here to learn how.

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