Contrarian Play: 8 Takeover Targets With Bearish Options Sentiment

All in all, 2010 was a solid year for M&A activity, which got a nice boost off the Takeover Mania that gripped Wall Street last summer. After reaching its fevered peak in the record-breaking month of August, things cooled off a bit for the latter part of the year. But with debt cheap and corporate cash stockpiled high, 2011 is expected to be a banner year for acquisitions, as companies feed their need for faster growth in a still-sluggish economy.

Which means that investors with an appetite for above-average gains can potentially make a mint -- if they play their cards right.

When acquirers make a tender offer on a company, they usually pay a premium on the stock -- since full shareholder approval is needed to move forward, it doesn't hurt to grease the wheel a bit by adding a little profit incentive. Investors savvy enough to spot these takeover targets before they're taken stand to gain from the transaction.

However, finding the next takeover is easier said than done. So we started with a list of takeover targets identified by various publications like Barron's, UBS, Morningstar, Wall Street Journal, Marketwatch, TheStreet.com, and StreetInsider (access the entire universe here). We then collected data from the options market to narrow down the list.

Option traders buy contracts that give them the future right, but not the obligation, to buy or sell stocks at a certain price. When you buy a call option, it means that you expect the price of the underlying stock to soar. On the other hand, buying a put option means that you're betting on the stock price to decline.

To find our list of takeover targets, we looked for the companies that have seen a sharp rise in their put/call ratio over the last two weeks -- meaning there's a great deal of bearish sentiment around these stocks.

While this may seem counterintuitive, some technical traders view the put/call ratio as a contrary indicator when it reaches extreme highs or lows. Simply put, because the stocks mentioned below have a low number of open call option positions, contrarians would take this to mean that most of the stocks mentioned below are set for a jump in price. What do you think?

Options data sourced from Schaeffer's. The list has been sorted by the put/call ratio.

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.