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Grin and Bare It

By Rick Munarriz – Updated Apr 6, 2017 at 1:19PM

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Disruptive growth stocks keep getting bought out.

There's another buyout in the Rule Breakers scorecard.

Bare Escentuals (NASDAQ:BARE), the maker of mineral-based cosmetics, is being acquired in a $1.7 billion deal. Japan's Shiseido will pay $18.20 a share in the all-cash transaction, a healthy 43% premium to last night's close.

This isn't too shabby for a stock that was trading as low as $2.45 back in March.

Sarah Goddard recommended Bare Escentuals to Motley Fool Rule Breakers two summers ago.

"Bare Escentuals defined a niche, built it, and then took on the mainstream as the world's first, largest, and most recognized maker of all-natural mineral makeup," she wrote at the time. "Bare Escentuals stacks up well against other cosmetics companies, with higher growth and operating margins."

One of the bittersweet benefits of investing in disruptive speedsters is that they are prime prey for larger companies. Whether it's a mature acquirer looking to jump-start its growth or simply a worried behemoth with a "kill it in the crib" mentality, small growth stocks that are redefining industries are often taken out at healthy premiums.

Bare Escentuals isn't the first active recommendation in the growth-stock newsletter service to be snapped up, of course.

  • Microsoft (NASDAQ:MSFT) bought aQuantive in a whopping $6.6 billion deal.
  • CBS (NYSE:CBS) beefed up its dot-com foothold with CNET Networks.
  • ProFlowers.com parent Provide Commerce was clipped by Liberty Media Interactive (NASDAQ:LINTA).
  • eBay (NASDAQ:EBAY) expanded overseas when it bid on South Korea's Gmarket.
  • Illinois Tool Works (NYSE:ITW) took to Click Commerce.
  • Bankrate generated "interest" from eventual buyer Apax Partners.

None of this means that investors should buy into disruptive growth stocks with expectations of a buyout at higher prices. That is not a reasonable Plan A. Investors need to find stocks that will appreciate on their own merits. If an industry bigwig or private-equity firm comes around to seeing it the same way at a higher price point down the road, that's just exit-strategy icing on the cake.

Bare Escentuals was attractive to Goddard when she saw the brand's breakthrough and appealing cosmetics selling briskly at Sephora, Ulta, and QVC. Global cosmetics giant Shiseido is just coming around -- fashionably late, as most buyouts are -- with the ladle to scoop out the gravy.

Do you own any stocks that you think are buyout bait? Make your case in the comments box below.

Bare Escentuals is a Motley Fool Rule Breakers selection. Motley Fool Options recommends a bull call spread on eBay, which is also a Stock Advisor pick, and a diagonal call strategy on Microsoft, which is also an Inside Value pick. Feel free to take any of the services for a free 30-day trial subscription offer.

Longtime Fool contributor Rick Munarriz never did well on makeup exams. He owns no shares in any of the stocks in this story and is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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Stocks Mentioned

Bare Escentuals, Inc. Stock Quote
Bare Escentuals, Inc.
BARE.DL
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$237.45 (-0.20%) $0.47
eBay Inc. Stock Quote
eBay Inc.
EBAY
$38.13 (-0.16%) $0.06
Paramount Global Stock Quote
Paramount Global
PARA
$19.66 (-2.53%) $0.51
Illinois Tool Works Inc. Stock Quote
Illinois Tool Works Inc.
ITW
$187.24 (-0.26%) $0.49
QVC Group Stock Quote
QVC Group
QVCA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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