The TakeOver Trader

The TakeOver Trader: 3 Ways to Master the “Skim” Trade This Year

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Wednesday, January 9, 2008: Issue #750

Potential takeover targets represent one of the best short-term moneymakers that exist. The profits just can’t be beat…

Research out of The Journal of Economic Perspectives pegs the average gain at 38%, based on a sample of more than 4,200 deals. And that’s in a single day. Obviously, the averages only tell part of the story…

There are countless examples of much higher returns. Last year, for instance, my TakeOver Trader subscribers netted a 63% gain when Oracle announced it was acquiring Hyperion Solutions for $3.3 billion.

I’ve yet to find another investment with similar upside potential in such a short amount of time. And I have a great way of spotting these deals early. Three ways, actually…

Takeover Payday Is as Easy as 1, 2, 3…

To win at the takeover game, you have to identify companies in time to “skim” profits as a deal is announced. And it’s actually not that difficult if you know what to look for…

After evaluating hundreds of deals in recent years, I’ve discovered three signs a takeover could be nigh. Here they are, plus several companies where the takeover potential is particularly high right now…

Takover Target #1: Tracking the Merger Monday Phenomenon

For some reason, the bulk of M&A deals are announced on Mondays. My guess is that investment bankers use the weekends to finalize deals, when there’s no chance someone can leak information and impact current prices ahead of a final agreement.

Regardless of the reason, if you simply clip out the deals announced in the Monday edition of the Wall Street Journal for a couple weeks, making note of the industries or sectors of each company, you’ll be able to hone in on takeover targets with ease.

You see, consolidation is a powerful force. And when multiple firms in the same industry or sector get gobbled up, chances are good that deals involving their closest competitors won’t be far off. It’s this strategy that recently tipped me off to MicroStrategy Inc. (Nasdaq: MSTR) and Wimm-Bill-Dann Foods (NYSE: WBD) – two stocks I consider compelling takeover targets today.

Takover Target #2: Follow the Insiders

Nobody knows better than insiders if they’re preparing the company for an eventual sale. So keep an eye on their buying activity. If they start buying in clusters, a takeover could be in the works. And if the company happens to be in an industry that’s consolidating as well, the chances are even greater an offer is expected.

Both conditions currently apply to Colonial Bancgroup (NYSE: CNB), a regional bank that’s been unfairly punished in the broad-based financial selloff.

Takover Target #3: Look For Spikes in Options Trading Volume

We’ve all been told secrets before. And what do we do? We eventually share them with someone. On Wall Street, privileged information leaks out in a similar fashion. And the way to track such secrets is through daily options trading volumes.

If you’ve found a stock that meets criteria #1 and #2 above, pay attention to trading activity in the front month call options. As a Yale study confirmed, “Prior to takeover announcements, call volume imbalances are strongly positive related to next-day stock returns.”

Put simply, if a stock is trading for $10 and investors pile into $15 front-month calls, the only explanation is a takeover. Nobody’s foolish enough to buy options that require a 50% move in the stock in less than 30 days to profit. Unless, of course, they have very credible information. We saw this phenomenon play out several days before a deal for Alltel was announced, which eventually netted TakeOver Trader subscribers another double-digit gain.

In short, expect the takeovers to keep coming in 2008. And don’t be misled into thinking it’s too late (or difficult) to get in on the frenzy.

Good investing,

Louis Basenese

Editor’s Note: To get a steady stream of these takeover “skim” trades delivered right to your inbox, here’s how to use Lou’s service to put an extra $5,250 a month into your account. This year, Louis plans to capitalize on “attractive targets for international buyers, as I’m convinced a weak dollar will encourage more cross-border deals in 2008.” Learn more.

Today’s Investment U Crib Sheet

The takeover frenzy is certainly alive and well, and on Mondays indeed… The first three Mondays in December were the busiest since July, according to Reuters, when “deals hit the market before investors have even had their first cup of coffee.” Take a look at the worldwide M&A volume on these days…Monday, December 3rd $35.9 billion

Monday, December 10th $42.4 billion

Monday, December 17th $26.5 billion
Of course, shareholders of Shore Financial Corporation (Nasdaq: SHBK), prefer Wednesdays… This morning at 6 a.m., Hampton Roads Bankshares (Nasdaq: HMPR) and Shore announced that the two companies are merging. It’s a cash and stock deal that sent shares of Shore Financial 41% higher today, to $18.25. Not bad.

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