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Contributors: Douglas McIntyre Jon C. Ogg

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Saturday, September 23, 2006

Weekend Edition: Rumors and Market Talk Taking Gap (GPS) Higher

Beauty is still in the eye of the beholder. Today, shares of Gap Inc. (GPS) are up over 2% at $18.32. Just last week we noted Lehman’s upgrade to an “Outperform” and $21.00 target being the first bulge bracket firm to come out with an upgrade to a favorable positionin quite some time, and the stock has not looked back once since then.

This will make 7 consecutive trading days since the stock closed in red. Its shares are up over the 200 day moving average since that upgrade, and it gets the stock back to within 6% of its 52-week highs.

There has been relentless talk that the company has been on private equity watch lists, and it routinely comes up in cash flow analysis screens for stocks that would make sense to buy. While it is actually in the need of a turnaround, this may still fit the bill of what a private equity firm would be willing to do. The key issue here is that the company has a $15 Billion market cap.

With all the private equity money out there that is easily within the realm of possibilities, particularly after the size of management-led buyouts like Kinder Morgan (KMI) and HCA (HCA). Now there is some speculation that the revered Eddie Lampert of Sears (SHLD) may have an interest in the company. It should be noted that a same rumor was out there last week that he may have taken a stake in Home Depot (HD), so there is no way to know if there is any truth. Sears (SHLD) has a market cap in excess of $24 Billion, and it isn’t clear if this would be a target for Sears/K-Mart/etc or if this would be a new target from him personally in a new group. Eddie Lampert does not like his associates and contacts speaking, and there are actually very few analysts that feel they can adequately cover and make estimate predictions on SHLD because of that.

What is clear now is that the analyst call last week from Lehman was a great call, and we pointed to this being a ground-breaking change that could have many positive implications in the name. In stock options there have been over 2,000 of the OCT $17.50 Calls and over 9,000 of the OCT $20 Calls. The longer-dated contracts have been very thin, so if you though the options traders knew something your guess would be that something is going to happen soother rather than later.

Jon C. Ogg

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