The following five stocks are firmly planted in the buyout rumor mill currently. The takeover chatter regarding these stocks seems to be everywhere. The funny part is, it is always by the same person ... someone familiar with the matter. Seriously though, the five stocks I have selected do seem to be good takeover candidates for various reasons. Some have even stated they are currently in negotiations at this time.
Secondly, the following five stocks have certain positive fundamentals and share prices trading at or below $5. Stocks trading for $5 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. These are stocks that may provide more bang for your buck as evidenced by Friday's price action in many of the names.
In the following sections, we will take a closer look at these stocks to ensure the mean target prices are justified. We will perform a review of the fundamental and technical state of each company to determine if the right time to buy is now. Finally, we will review the specifics of each buyout rumor. The following table depicts summary statistics and Friday's performance for the stocks.
Advanced Micro Devices, Inc. (AMD)
The company is trading 74% below its 52-week high and has 36% upside based on the consensus mean target price of $2.92 for the company. AMD was trading Friday for $2.14, up nearly 5% for the day.
AMD has some fundamental positives. The company trades for approximately 24% of sales and 1.48 times book value. EPS for the next five years is projected to be 6%. AMD has $1.83 in cash per share. Insider ownership is up 88% over the past 6 months.
Technically, the stock had been the definition of a falling knife but seems to have found a bottom at the $2 mark. The stock is currently in accumulation.
AMD is struggling due to the decline of the PC. The company has been unable to break into the tablet market and its revenues are dropping precipitously. AMD shares have risen and fallen on speculation that the semiconductor company could be headed for a buyout. Qualcomm and Samsung have both been mentioned as potential suitors.
I believe the buyout rumors regarding AMD may be overblown. The technical and fundamental state of the company is inviting yet no real catalyst is on the horizon. I feel the probability is low at this time.
Clearwire Corporation (CLWR)
The company is trading 18% below its 52-week high and has 18% upside potential based on the analysts' mean target price of $2.85 for the company. Clearwire was trading Friday at $2.40, up nearly 9% for the day.
Fundamentally, Clearwire has some positives. EPS is up 78% quarter over quarter. EPS is expected to be up 32% next year. The company has $0.81 cash per share. On November 8th RBC Capital Markets upgraded the stock from Underperform to Sector Perform and raised their price target from $1.50 to $2.50.
Technically, Clearwire had a parabolic spike after positive comments were made on the earnings conference call. The stock has been consolidating for the last month after the parabolic move higher. The golden cross was achieved in mid-October.
I posit Sprint (S) will complete the purchase of Clearwire after the Softbank deal is finalized. RBC Capital analyst Jonathan Atkin raised his rating on the wireless broadband carrier to Sector Perform from Underperform for the same reason.
I agree with this analysis and feel the risk/reward ratio favors long trades at this juncture. Nevertheless, the stock is up nearly 9% Friday alone. I never start a position after a spike of this nature. You should wait for a pullback to get in.
Groupon, Inc. (GRPN)
The company is trading 84% below its 52-week high and has 24% potential upside based on the consensus mean target price of $5.12 for the company. Groupon was trading Friday at $4.10, down nearly 10% for the day.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 18.92 and trades for 10 times free cash flow. EPS and sales are up substantially quarter over quarter. EPS next year is expected to rise by 41% and by 27% for the next five years.
Technically, the stock is in a well-defined downtrend, yet has leveled off and seemed to find a bottom at the $3 level. Since the stock has rebounded 50% and broke through the first level of resistance at the 20-day sma and has the 50-day sma in its sights.
Groupon is up sharply on news Tiger Global has taken a 9.9% stake. The news comes a week after George Soros and Paul Tudor Jones disclosed they bought shares of the daily deals leader in the third quarter.
Groupon recently announced it is now the choice service for Major League Baseball's Interactive Media and Internet Company. Through this deal, the MLB will handle the deals from its 30 clubs right through the GrouponLive events platform.
The stock is down 85% from the IPO price and has Tiger Global Investments looking over the board's shoulder. I like the stock here, and the odds of a buyout offer are good at this point. I posit Tiger, Soros and Jones aren't in the name for the long haul. They are here to rehab the company's reputation and sell it at a premium.
SUPERVALU Inc. (SVU)
The company is trading 71% below its 52-week high and has 30% potential upside based on the consensus mean target price of $3.13 for the company. SVU was trading Friday at $2.38, up over 4%.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 4.65 and trades for 6 times free cash flow. The company is trading for 1% of sales according to Finviz.com.
Technically, the stock is in a well-defined downtrend, yet has leveled off and seemed to find a bottom at the $2 level. The stock spiked in late October when it announced it has been in talks with several different parties over potential deals.
Citi's Deborah Weinswig lifted her price target on SVU to $3 from $2 with the grocery store chain closing in on selling off some assets. I have taken a position in the stock. I like the technical and fundamental state of the stock and believe a buyout offer is in the making above the $3 mark.
Vringo, Inc. (VRNG)
The company is trading 41% below its 52-week high and 195% above its consensus mean target price of $10.00 for the company. Vringo was trading Friday for $3.46, up nearly 1% for the day.
Fundamentally, Vringo has few positives. The company has a gross margin of 74%. EPS this year is up 41%. Vringo has $0.66 in cash per share. Nevertheless, the reason investors may start a position in Vringo will most likely not be based on fundamentals but the buyout potential.
Technically, the stock has leveled off and been under accumulation for several months. The stock has been in a trading range between $3 and $6 with volatile swings from top to bottom of the trend channel. This is standard behavior for patent lawsuit plays. Currently the stock is resting near the bottom of the channel just above the 20-day sma.
Vringo Inc. was awarded about $30 million in damages and granted future royalties by a federal jury in its patent suit against a handful of technology giants, including Google Inc. and AOL Inc.
I posit once Vringo settles all outstanding patent litigation the company will be bought out. I don't see management teams hanging around to ensure the royalty checks are deposited into the correct accounts. The question is for how much. It currently has the most upside, yet may have the longest time horizon as well.
The Bottom Line
I believe you should have a portion of your portfolio dedicated to speculation. The percentage is up to you based on your risk tolerance and suitability. Stocks in companies with buyout rumors definitely fit into this category. The stocks covered in this article are currently trading on average 57% below their 52 week highs and have 61% potential upside based on analysts' mean price targets. In general, the more upside potential the higher the probability of buyout offers.
I chose SVU due to the solid fundamentals and the fact current stock price has cooled down since the initial rumor. I believe the time horizon is short as well. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk. Set a 5% trailing stop loss to minimize losses even further if you wish.
Disclosure: I am long SVU.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.