The promise of outsized returns sends many investors in search of takeover targets to add to their portfolios, hoping to see gains from the companies looking ripe for the picking. It's no secret that stockholders' shares are typically purchased at a premium by the acquiring company -- and that's a pretty compelling selling point.
But the strategy only works if you correctly anticipate the takeover -- and the numbers suggest that it's a lot easier said than done.
According to a report compiled by Bloomberg, only 14.5% of takeover gossip circulating online and in-print over the past five years actually panned out. And even assuming the germ of the rumor to has some basis in reality -- which most don't -- it's still nearly impossible to turn a profit from it.
At least according to Todd Salamone, equity analyst at Schaeffer's Investment Research Information. Any intel spreads through the market like wildfire, via email and instant message -- so by the time it reaches you, the general public, it's already old news, and the shares have already staged a rally. And other indicators of bullish sentiment, like options sentiment, tend to be pretty hit-or-miss.
An alternative way to play the M&A trend? "Bet it's wrong." Short-sellers sell high in order to buy low, by borrowing shares from other investors, selling them on the open market, and closing the short by buying back the same number of shares initially borrowed. If the short-seller can buy back the stock at a lower price, he turns a profit off the difference.
John Orrico of Water Island Capital LLC tells Bloomberg that his firm "see[s] it as an opportunity to sell if we think the [takeover] rumor is false or ridiculous, which in most cases they are." This strategy has repeatedly seen strong results: betting against takeover rumors has historically generated more than twice the average return of U.S. stocks since 1900 before dividends, adjusting for inflation.
So which rumors are looking doubtful? To find out, we started with a universe of about 250 rumored takeover targets (access the entire universe here). We then collected data on short sales, and identified the companies that have recently seen a sharp increase in shares shorted.
|
Company |
Source of Takeover Rumor |
Short Float |
Shares Shorted Between 9/30-12/31 |
|---|---|---|---|
|
Travelzoo |
Business Insider |
29.48% of the company's shares have been shorted, which equals 5.38 days of average volume |
Increased from 1.01M to 1.63M (+61.39% change) |
|
GameStop |
Barron's, TheStreet.com |
26.38% of the company's shares have been shorted, which equals 10.44 days of average volume |
Increased from 28.51M to 38.4M (+34.69% change) |
|
Savient Pharmaceuticals |
Street Insider |
19.32% of the company's shares have been shorted, which equals 3.91 days of average volume |
Increased from 10.33M to 13.42M (+29.91% change) |
|
Terremark Worldwide |
Barron's |
16.12% of the company's shares have been shorted, which equals 14.69 days of average volume |
Increased from 6.38M to 8.05M (+26.18% change) |
|
BancorpSouth |
Dick Bove, Banking Analyst |
12.92% of the company's shares have been shorted, which equals 10.16 days of average volume |
Increased from 7.58M to 9.45M (+24.67% change) |
|
Atheros Communications |
Barron's |
13.14% of the company's shares have been shorted, which equals 2.72 days of average volume |
Increased from 7.78M to 9.36M (+20.31% change) |
Short trends data sourced from AOL Money. All trends occur between 9/30-12/31. The list has been sorted by the change in shares shorted.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.
