A special situation is a company-related event that is likely to affect the stock performance based on factors other than the market environment.
In a special situation, something other than business-as-usual or the underlying fundamentals of the company affects the stock's performance.
Examples of special situations include takeovers, spin-offs, mergers, bankruptcy scares, revolutionary new products, or significant management change. Special situations provide value investors with opportunities to buy a stock when it is mispriced or substantially undervalued relative to its intrinsic value.
A classic special situation investment was Warren Buffett's bet on American Express in the wake of the salad-oil scandal. The value of the stock dropped substantially when it was revealed that a subsidiary's loan inspectors had been duped by Allied Crude Vegetable Oil's Anthony de Angelis. However, the underlying business of traveler's checks and credit cards had not been damaged, and Buffett invested heavily. The stock price tripled over the next two years.