5 Takeover Candidates Hedge Funds Are Betting On

by: Insider Monkey

By Matt Doiron

Buying into takeover rumors is risky: often, there's no basis behind them and the stock eventually gives up any gain from the rumor. However, since legitimate takeovers occur at a premium to the stock price - as the acquirer generally sees enough of a combination of undervaluation and potential synergies to make the deal worth it - it is the case that if investors look into a rumor and determine that it might be genuine then they may earn a high annualized return from investing. Our research has shown that hedge fund sentiment is a very powerful signal investors can use to beat the market. For example the most popular stocks among hedge funds outperformed the market by 18 percentage points per year historically and the outperformance reached 30 percentage points over the last 9 months (see the details here). Hedge funds usually invest in takeover candidates when the likelihood of a deal is high or before they decide to go activist on the company. We have gone through our database of 13D, 13G and 13F filings and here are five stocks that have recently been the subject of takeover rumors and that are owned by hedge funds or other notable investors:

Saks (NYSE:SKS) leads our list of rumored targets; the company has reportedly hired Goldman Sachs to help sell the business. The company's most recent quarter ended in early May; while revenue was up slightly versus a year earlier, net income fell by nearly 40%. Saks carries trailing and forward P/E multiples of 44 and 29, respectively, and given the recent financial performance we don't think that it is a good value - investors seem to be depending entirely on some sort of transaction. Fisher Asset Management, managed by billionaire Ken Fisher, disclosed ownership of 5.5 million shares as of the end of the first quarter of 2013 (find Fisher's favorite stocks).

IBM and/or Oracle may be interested in acquiring Jive Software (NASDAQ:JIVE), a $1.1 billion market cap enterprise software company whose products better enable communication among employees, customers and company partners. A total of 20% of the float is held short, so many market players not only doubt these rumors but also consider Jive overvalued as is. While revenue has been up strongly - rising 34% last quarter compared with the first quarter of 2012 - the company is expected to be unprofitable both this year and next year. John Thaler's JAT Capital Management initiated a position of 2.3 million shares in the first quarter of 2013.

Rumors continue that BlackBerry (NASDAQ:BBRY) might be bought out by large tech companies, potentially including IBM. BlackBerry is unprofitable on a trailing basis, and while it has more than doubled in price since the end of August its future continues to be uncertain in a more competitive smartphone industry. The most recent data shows that about a third of the float is held short. While earnings numbers have been poor, EBITDA has been considerably stronger and the trailing EV/EBITDA multiple is less than 5x. Billionaire Andreas Halvorsen's Viking Global reported a position of over 15 million shares at the end of March.

$16 billion market cap generic drugs manufacturer Actavis (ACT) is rumored to be pursued by a number of large pharmaceutical companies including Valeant and Novartis. Interestingly, Actavis had been a buyer itself with a recent purchase of Warner Chilcott. As it stands, the business is valued at 14 times consensus earnings for 2014; we'd also note that its beta is low even among pharmaceutical companies at 0.2, reflecting little dependence on economic conditions. Our database of 13F filings shows SAC Capital Advisors, which is run by billionaire Steve Cohen, with about 620,000 shares (check out more stocks SAC owns).

Another potential takeover target is Fusion-Io (NYSE:FIO), a data storage platform company with a market capitalization of $1.4 billion. The stock is down over 50% from its highs last October, as adjusted earnings numbers have been down and even with the sell-side looking for some improvement over the next few quarters the forward P/E is over 50. Fusion-Io is another popular short target, with over 40% of the float held short. Billionaire David Tepper's Appaloosa Management had a relatively small position in Fusion-Io at the beginning of April, though the fund had increased its stake by 25% since three months earlier.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.