5 Takeover Rumors Hedge Funds Have Been Buying

Includes: BBRY, CHK, HLF, LNG, VOD
by: Insider Monkey

By Matt Doiron

Acquirers of a public company pay a significant premium to the pre-announcement share price, which leads to the stock reacting quite positively even to rumors of a takeover. Buying stocks purely on the existence on a rumor is generally a bad idea and certainly very speculative, though investors can at least attempt to divine the truth behind any potential situation (in addition, takeover rumors often are rooted in at least a broad argument that a company is undervalued). Here are five stocks which have seen some takeover chatter recently, along with some of the hedge funds and other notable investors who are long the stock (though in some cases that might be purely based on value concerns):

One of the biggest takeover rumors that has been swirling is that Verizon (VZN), either by itself or with a partner such as AT&T (NYSE:T), would buy global telecom Vodafone (NASDAQ:VOD) in order to gain full control of Verizon Wireless (it's also possible that Verizon would merely buy Vodafone's minority stake). The theory is that Vodafone is cheap enough that the market must be discounting its share of Verizon Wireless. Billionaire David Einhorn of Greenlight Capital argued for such a transaction in a letter to investors, before writing (anticipating that the letter would be leaked) "[m]aybe there is an investment banker with time on their hands reading this letter." Check out Einhorn's stock picks.

Billionaire Carl Icahn has taken a large stake in Herbalife (NYSE:HLF) following the stock's volatility after fellow billionaire Bill Ackman alleged in December that the company is a pyramid scheme. Read more about the battle between Ackman and Icahn. In this case, there's some speculation that Icahn himself could take the company private, although lenders would have to be extremely confident that there will be no legal action against Herbalife. Herbalife currently trades at 9 times trailing earnings, pays a dividend yield of well over 3% at current prices, and reported double-digit increases in both revenue and earnings in the fourth quarter of 2012 versus a year earlier.

There has been some speculation of a takeover of troubled energy company Chesapeake (NYSE:CHK), which has been hit hard by low natural gas prices following the business's overinvestment in supply capacity. Icahn has maintained a large position in Chesapeake for about a year, and recently pushed out the company's controversial CEO. Earnings continue to fall, though Wall Street analysts expect the company to recover: the forward P/E is only 10 and the five-year PEG ratio is 0.3, though it's not necessarily a wise idea to put too much weight on analyst projections as well as takeover rumors.

BlackBerry (NASDAQ:BBRY) has been rumored as a possible takeover target, even after the stock has more than doubled from its levels last summer. The manufacturer of Blackberries has valuable market share in the smartphone market, even if the company itself is having trouble competing with Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), and CNBC host Jim Cramer has suggested that Microsoft (NASDAQ:MSFT) or Nokia (NYSE:NOK) might be interested. Billionaire and Tiger Cub Andreas Halvorsein's Viking Global more than tripled the size of its position in BlackBerry between October and December, to a total of almost 16 million shares (find Halvorsen's favorite stocks).

Private equity buyers might be interested in Cheniere Energy (NYSEMKT:LNG) according to rumors. Cheniere is in the liquefied natural gas terminals business; due to high natural gas production in the United States, a significant spread in prices has opened up between domestic markets and the rest of the world. This allows exporters to earn high profits through arbitrage, although natural gas is difficult to export both technically and because of government regulations. The sell-side is expecting Cheniere to be unprofitable both this year and next year. Third Point, managed by billionaire Dan Loeb, initiated a position during Q4 2012.

Disclosure: I am long T, VOD, CHK.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.