This is Part 2 of my new series of articles about companies that have imminent catalysts that should cause their shares to surge higher. I have been invested in and writing about the former owner of the Washington Post, Graham Holdings $GHC, since early 2014. During that time the stock has outperformed the S&P 500 +51.11% to +12.32% (for details on that trade see my on-line special situation portfolio). A one-year chart of $GHC vs. the S&P 500 (click to enlarge) The thesis behind my initial purchase was that the company's stock swap with Warren Buffett's Berkshire Hathaway BRK-A was a brilliant way for it to monetize an investment that it had made without having to pay any taxes on it. It enabled Graham Holdings to retire 22% of its shares at a price below its net asset value at the time of $825/share. The great blog by Brooklyn Investor had a post describing the transaction: Graham Holdings Split-Off http://brooklyninvestor.blogspot.com/2014/02/graham-holdings-split-off.html Since then shares of Graham Holdings have continued to appreciate. They are now sitting at a whopping $1,066/share. Such an expensive price per share might scare some investors off. As I have been explaining to my ten year-old son who I am teaching about investing, a high price in terms of dollars does not necessarily mean that a stock is expensive. There's a huge difference between price and value. I believe that $GHC still represents a tremendous value. This holding company is still extremely cheap on a sum-of-the-parts basis. Lots of companies are cheap when looking at the sum of their parts, but what's special about Graham Holdings is it has management that is committed to monetizing its assets and unlocking value. So much so that I have been adding to my position, even after the 50% rise. An event is scheduled for the near future that should serve as a catalyst to drive Graham Holdings higher. The company is set to spin off its Cable ONE cable business. Shares of Cable ONE begin trading on a "When Issued" basis tomorrow under the ticker "CABO WI". With all of the consolidation in the cable sector lately, I strongly suspect that Cable ONE will not remain an independent company for long. Graham likely would have sold the division already if it wasn't for the negative tax implications. Graham Holdings Company Declares Spin-off Dividend of Cable ONE Shares http://finance.yahoo.com/news/graham-holdings-company-declares-spin-204500898.html I first became aware of how undervalued and desirable Cable ONE was by reading an interview with the controversial, yet brilliant special situation investor Mario Gabelli in the Roundtable issue of Barron's earlier this year. There he discussed spinoff of Cable ONE business: "Gabelli: ...My first idea today is Graham Holdings, which used to be the Washington Post. There are 5.8 million shares, including a million A shares, which have 10 votes apiece and elect 70% of the directors. The B shares have one vote and elect 30% of the board. The company is controlled by the Graham family, which sold the Washington Post to Jeffrey Bezos in 2013. Last year, in a so-called cash-rich spinoff, Graham swapped its ownership in a Miami television station, and cash, for Graham stock owned by Warren Buffett’s Berkshire Hathaway [BRKA]. Graham also sold some other assets separately. Today, the company holds cash, cable-TV assets, television stations, the Kaplan education business, a marketing company called Social Code, some real estate, and other assets. Graham has $120 a share in cash. The TV stations are worth about $250 a share. Cable ONE, its cable business, is worth $500 a share. Altogether, that’s $870 a share in assets. Graham has announced a spinoff of Cable ONE, which will occur sometime this year. If Cable ONE is bought by another company after the spinoff, shareholders avoid a double tax. Schafer: How does that work, exactly? Gabelli: If Graham sold the cable business, it would pay a tax on the proceeds, and shareholders would pay a tax on the gain. If the business is spun off and then sold, there is only a tax at the shareholder level. A cash-rich spinoff is a terrific tax benefit, too. John Malone [chairman of Liberty Media (LMCA)] and Buffett have done well with cash-rich spinoffs. Graham has an overfunded pension fund, so it has assets to buy other businesses. Graham is trading for $870 a share. Shareholders are getting the Kaplan business for free. In addition, the cable asset is going to be monetized. Broadcasting Ebitda was about $190 million for 2014. That will drop to $160 million this year because of a decline in election-related advertising spending. Next year, however, there will be a tsunami of spending on political advertising. Graham’s TV stations are in markets such as Houston, Detroit, Orlando, San Antonio, and Jacksonville. They could also get a benefit from spectrum auctions. The cable business has about $300 million in Ebitda. It will be spun off with about $450 million of debt. How much is Kaplan worth? Gabelli: Kaplan is the wild card. It runs a for-profit college. In the U.S., the for-profit education industry is facing challenges. Kaplan also has a test-preparation division, which has about $30 million in Ebitda. Kaplan’s non-U.S.-college business has done OK. Based on deals done for comparable companies, Kaplan could be worth as much as $800 a share." Barron’s 2015 Roundtable: Part 3 http://online.barrons.com/articles/2015-barrons-roundtable-strategies-for-a-new-age-1422692154 That article, and a number of others including ones on the Value Investors Club and this one over on Seeking Alpha Graham Holdings: Multiple Potential Catalysts To Narrow Sum-Of-The-Parts Discount http://seekingalpha.com/article/2896176-graham-holdings-multiple-potential-catalysts-to-narrow-sum-of-the-parts-discount were the catalyst for me to purchase more shares of $GHC. After Cable One has been spun off, one of two things will likely happen. The spinoff itself will be cheap, causing me to purchase more shares in anticipation of a likely buyout OR the remainder of Graham Holdings will be cheap, allowing me to scoop up shares of it at a discount. That's the great thing about special situations like this, there's a number of ways for investors to make money.