M&A Gets Fierce, Here’s How We’re Finding ‘1 Percent’ Trades

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

If you thought buybacks were a huge factor in driving stock prices, consider the humble buyout when you’re looking for performance better than what 99 percent of the market has been able to provide lately.

Just ask investors who’ve had access to my GameChangers trading service. Two out of the last six stocks I’ve recommended there were acquired at big premiums. This boosted the already huge performances across the board.

While I don’t like to brag, there’s a reason to do it here. Dissecting those trades alongside our other recent wins may help you achieve something similar with your own portfolio, even in unsettled periods where it can feel like the next market crash is always around the corner.

We beat 99 percent of the S&P 500 over the last six months. And we did it again and again. Here’s how.

Think Like a Strategic Investor

Close to $4 trillion worldwide was funneled into strategic acquisitions last year. The deal flow this year should easily surpass that figure as another year of lower taxes will start to replenish the corporate war chests.

There’s also a note of urgency as headline growth rates have begun to slow and financing rates have begun to pause. Executives with vision feel a greater need to absorb more dynamic rivals and know that if they’re going to borrow billions to do it, now is the time.

Then you add depressed asset prices to the mix. With so many stocks trading at their lowest levels in months, if not years, it’s tempting to push the “buy” button before they recover.

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After all, those executives think like I do. They’re looking for the best place to put their capital in order to capture growth at a good price.

The only difference is that in my world, we buy stocks which signal that they’ll rise far and fast enough to provide a profitable exit. Often, that exit is the strategic investor’s entry point.

Take a look at The Ultimate Software Group Inc. (NASDAQ:ULTI), which was bought out on Feb. 4 by a private equity consortium for $331.50 per share.

When I initially recommended ULTI on Nov. 13 at just under $250, I wasn’t even thinking of the buyout potential. For me, it was simply a matter of relative value (41X earnings is a bargain in the cloud software group) that was matched by an impressive 20 percent growth.

While we had the entire market to choose from, just like strategic investors, we picked the stock which gave us the most dynamic exposure to the cloud we could get for the price.

And since private equity felt the same way, our stock is now off the board with a 33 percent profit to show for an 83-day holding period.

After we pocket the cash, we move on to the next opportunity that flashes. All the while, we are always hoping to get there before the big players move in.

That’s life in the GameChangers world. A similar story played out a month ago when Eli Lilly & Co. (NYSE:LLY) offered $235 per share for LOXO Oncology Inc. (NASDAQ:LOXO).

Once again, what drew my eye was the growth profile. Back in August, LOXO was on the edge of submitting its novel cancer cure to the regulators for approval.

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We pushed the button at $160. By November, the drug got its green flag and the company’s days of independence were numbered.

This time, the profit added up to 45 percent in less than five months. Once again, I need to shift my focus to the next little biotech company with true GameChanger prospects.

Don’t Wait For The Offer Buzz

Looking back at those wins, the secret of our success is really simple. We think like strategic investors and crunch every balance sheet and income statement in sight for opportunities.

However, we don’t pay attention to what those other investors are doing. I’m not about trying to anticipate deal headlines or get ahead of a big premium.

Since a lot of people on Wall Street trade on rumors, they’re often disappointed when no offer actually materializes.

We trade on fundamentals and are rarely disappointed, deal or no deal. GameChangers stocks start out with a more attractive growth profile at the best price I can find.

When they get bought out, I cheer. At the same time, it’s actually a little sad to see them absorbed into what’s usually a bigger, slower and more expensive enterprise.

Either way, waking up to news of a big offer only confirms what I saw all along and accelerates the process of unlocking value that might otherwise take months.

We win either way. That’s the point of the 99 percent statistic I used above.

It’s been a rough six months on Wall Street. The S&P 500 is down 5 percent and key stocks like Apple Inc. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) have lost 15-20 percent of their value.

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Every single stock I’ve recommended in GameChangers over that period has made money. Four of those positions have already closed, including the two I’ve described here.

Counting the ones that are still maturing on the buy list, those stocks have collectively climbed 23 percent, or 109 percent on an annualized basis.

Only four members of the S&P 500 can match that performance. We’re matching the top 1 percent of the blue-chip index in GameChangers, and we’re doing it again and again.

Of course it’s a lot of work, but it’s a lot of fun as well. I invite you to take a look for yourself.

 

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