In the stock market the present usually rhymes with the past in some way – that is certain patterns and situations tend to reoccur. The common theme behind the four trades discussed in this article is a temporary mismatch between the supply and demand for shares. I’ve used all four trading / buying strategies successfully over a period of nearly a decade.
1. The Cancelled Merger
Many investors, including some professional ones, spend a disproportionate amount of time trying to find the next take-over candidate. For the most part this is a fruitless exercise as it is often rumour driven and most of these deals never happen. This is hardly surprising given the number of variables that have to fall into place to make M&A viable.
A more interesting take on the M&A trade is when the deal fails to take place after all the publicity, which sees the share price bid up to a fat premium. For this trade, the best case scenarios are when the deal fails for regulatory reasons.
Admittedly, this trade is fairly rare, but it can be very profitable when it emerges under the right conditions.
A case in point was when US pharma giant AbbVie (NYSE:ABBV) attempted a $54 billion buyout of Shire (LON:SHP). It was scuppered by pressure from the US government in October 2014 as it cracked down on so called tax inversion deals – that is US companies reversing into foreign ones in countries with lower taxes.
Shares in Shire promptly plummeted from about £54 down to £38 each as panicked speculators sold out. But the reason why they were worth buying after the plunge was because Shire is a great business focused on drugs for rare diseases with high barriers to entry.
Crucially, its share price was on a roll long before AbbVie showed up. It also got a $1.635 billion severance fee – so its financials improved as well. Overall a profitable trade.
By contrast I didn’t buy shares in AstraZeneca (LON:AZN) when Pfizer’s (NYSE:PFE) takeover attempt got canned by politics in May 2014. Basically, the Anglo-Swedish pharmaceutical group had many long-term challenges relating to replenishing its depleting product line, there were growth issues and even doubts over the sustainability of its dividend.
I also side stepped buying shares in RSA Group (LON:RSA) when Zurich Insurance (VTX:ZURN) walked away from its £5.6 billion takeover bid in September 2015. The UK insurer has under-performed…
