By Nigam Arora
Companies are bought and sold every day, usually at attractive premiums
The character of this stock market is changing.
What has worked over the past nine years during the bull market may not work in the future. For investors serious about making money, it is high time to brush up on skills and learn new strategies.
At The Arora Report we advocate diversification by strategies. We have over 50 strategies in our quiver. One strategy that is especially appropriate for these volatile times is the "buyout strategy." In this strategy, the focus is to find companies that may get acquired, producing big gains for investors. To date, 144 of our portfolio companies have been purchased or significantly benefited from mergers and acquisitions.
Read:More than half of S&P 500 stocks are now in a bear market ()
How do you find such companies? Let us explore starting with three charts of real examples.
Please click here () for an annotated chart of the buyout of a biotech company, Tesaro (TSRO), by pharmaceutical company GlaxoSmithKline (GSK.LN).
Please click here (Red Hat (RHT), by IBM (IBM).) for an annotated chart of the buyout of a software company,
Please click here (Esterline Technologies (ESL), by TransDigm (TDG). Please note the following:) for an annotated chart of the buyout of a defense and aerospace company,
-- Astute investors do not become prisoners of the moves in the Dow Jones Industrial Average , S&P 500 ETF (SPY), Nasdaq 100 ETF (QQQ), small-cap ETF (IWM) and other similar broad index-based investment vehicles.
-- The first chart shows that the Arora buy signal for Tesaro was at an average buy price of $34.61. On Nov. 16, when the stock was trading in $30s, we wrote: "It will not be surprising to see a buyout north of $75."
Ten trading days later, Tesaro received a cash buyout offer at $75 per share from GlaxoSmithKline. In the business of investing, it does not get any better than this trade. The buyout price represented a return of 116%.
-- Tesaro is focused on poly ADP ribose polymerase (PARP) inhibitors. PARP repairs cell damage. However, in some forms of cancer, cancer cells are more dependent on PARP than the regular cells. This makes PARP an attractive avenue for cancer therapies. GlaxoSmithKline was interested in this strategic oncology asset and was willing to pay top dollar for it.
-- The chart shows The Arora Report signal to buy Esterline at an average price of $84.80. About two months later, TransDigm made a cash buyout offer of $122.50. That was a gain of 44%.
-- The number of large aerospace and defense companies has dwindled. There is a scarcity value, and the buyer was willing to pay up for Esterline. The acquisition is accretive for TransDigm.
-- The chart shows Arora buy signals on Red Hat at the average buy price of $43.41. At the time of the original call, we said that Red Hat was a buyout target and IBM was one of the most likely buyers. Now IBM is buying Red Hat for $190 per share in cash. That's a return of 340%.
-- Red Hat is known for open-source Linux software and an additional set of popular software for infrastructure. IBM has fallen behind the likes of Microsoft (MSFT), Amazon (AMZN) and Google (GOOGL) (GOOGL). It was simply logical for IBM to buy Red Hat to stay in the game.
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How to find such companies
The above examples show some of the following common elements in companies that are bought out.
-- The company has unique assets.
-- Strategic buyers are there with interest in the unique assets.
-- In many cases, the assets are such that financial buyers such as private equity are interested.
-- There are synergies that the buyer can bring.
-- The companies are willing to sell themselves.
-- The buyout strategy helps investors make money in both bull and bear markets.
Disclosure: Subscribers to The Arora Report (/) may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com (mailto:Nigam@TheAroraReport.com).
-Nigam Arora; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
December 18, 2018 07:40 ET (12:40 GMT)
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