This Strategy Makes Money 100% of the Time
By Dr. George Huang, editor, S&A FDA Report
June 22, 2009
On Friday, I shared two strategies for playing mergers. One right, one wrong.
The first – what I consider a sucker's bet – is sifting through thousands of stocks hoping to cherry-pick the next takeout target. The second – the easiest way to collect "free money" today – is jumping in only after a buyout announcement.
The fancy term for this second strategy is "merger arbitrage." (You can read the details on how exactly it works, here.)
Right now, merger-arbitrage trades are so lucrative because the "spreads" (the difference between the buyout price and the current stock price) are at the highest levels in decades. The recent financial chaos ended the days of easy credit. And financing uncertainties create more worry that deals will fall apart. The skyrocketing spreads reflect that risk.
In the last six months, some deals have indeed failed. But there's one market sector where the merger success rate in the past two years is a perfect 100% – health care.
This year is shaping up to be a year of massive consolidation in health care. In the last 12 months, more than 40 deals have closed. While merger and acquisition activity has slowed down to a trickle in other industries, health care buyouts have accelerated...
The world's biggest drugmakers (aka Big Pharma) are the primary driving force behind the flurry of deals. These players are staring down billions in lost sales as their patents on current treatments expire. But with over $100 billion in cash collectively, they have the resources to swallow up health care assets at distressed prices.
That is why, even in the most difficult credit environment of the last 30 years, we've witnessed more than 25 buyout offers so far in 2009. Most important – not a single health care buyout has failed due to financing issues.
In Growth Stock Wire, I showed you how to take advantage of the trend with Roche's $45 billion buyout of biotech bellwether Genentech. Scared investors didn't believe Roche could raise the $20 billion it needed to seal the deal. With an $89-per-share offer, the market pushed Genentech stock down into the low $70s. Roche eventually bought out Genentech at $95 per share. You could have banked 30% in just four months through stock.
My FDA Report readers used options to bank a total 65% on that deal. And we loaded up on a couple other merger trades, too...
For example, we doubled our money in October, when billionaire activist investor Carl Icahn sold biotech ImClone in a bidding war. Later, we collected more than 50% returns in just eight weeks when King Pharmaceuticals took out Alpharma. The market was skeptical the deal could close quickly. We knew better and made a killing.
Right now, two more mega-merger deals are set to close in the next few months: Pfizer's takeout of Wyeth and Merck's pursuit of Schering-Plough. These are both part of health care's huge buyout trend. And I expect these deals will close with no trouble.
You can buy Wyeth or Schering-Plough for a discount and pocket a quick gain when the deals close. In my advisory, we set up trades on both and have collected roughly 25% of our total possible returns. But there's plenty of free money left for the taking...
Good investing,
George Huang
P.S. As I said, it's not too late to pick up free cash from the Pfizer and Merck deals. Right now, you can scoop up about 7% in just a few months, for a 25% annualized gain with practically no risk. But I've told my FDA Report subscribers about two trades that could return 30% each in the next few weeks. Click here for the details. |
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Huge rally in health care IT continues... big players Cerner, HLTH, HMS, and Allscripts-Misys at new 52-week highs. |
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Paper companies surge... Int'l Paper, MeadWestvaco, and Schweitzer Mauduit all up over 100% since March. |
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99 Cents hits a new high... the dollar-store chain has spiked 26% since June 9. |
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Earnings today... Smith & Wesson, Walgreen. |
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Last |
Change |
52-Wk |
| S&P 500 |
920.35 |
+0.22% |
-31.46% |
| Oil (USO) |
38.24 |
-1.57% |
-64.23% |
| Gold (GLD) |
91.82 |
+0.23% |
+3.85% |
| Silver (SLV) |
14.00 |
+0.21% |
-18.38% |
| U.S. Dollar |
80.14 |
-0.56% |
+9.05% |
| Euro |
1.40 |
+0.55% |
-9.82% |
| VIX |
28.30 |
-5.76% |
+31.14% |
| HUI |
338.93 |
+3.07% |
-17.18% |
| 10-Year Yield |
3.78% |
-0.05 |
-0.38 |
|
| Company |
Sym |
Industry |
Edwards |
EW |
medical devices |
Schweitzer Mauduit |
SWM |
paper products |
RehabCare |
RHB |
physical therapy |
Todd Shipyards |
TOD |
shipbuilding |
99 Cents Only |
NDN |
dollar stores |
Rackspace Hosting |
RAX |
networks |
3PAR |
PAR |
data storage |
Wilber |
GIW |
bank |
GSC Acquisition |
GGA |
acquisitions |
Rubicon Minerals |
RBY |
metals |
Cerner |
CERN |
health care IT |
Sanderson Farms |
SAFM |
meat |
ICU Medical |
ICUI |
medical devices |
HMS Holdings |
HMSY |
business services |
Perfect World |
PWRD |
software |
Calavo Growers |
CVGW |
avocados |
Euronet Worldwide |
EEFT |
business services |
HLTH |
HLTH |
health care IT |
Spartan Motors |
SPAR |
trucks |
Acme Packet |
APKT |
telecom |
Inspire Pharma |
ISPH |
pharma |
Broadpoint Gleacher |
BPSG |
broker |
Clarient |
CLRT |
medical research |
Insmed |
INSM |
biotech |
|
| Company |
Sym |
Industry |
Callaway |
ELY |
golf equipment |
|
|
