In an article that I published on October 13th, 2011 I explained how traders can take advantage of a robust mergers and acquisitions (M&A) strategy. In short, according to a research by Yuan Gao and Derek Oler on M&A rumors and pre-announcement trading, in most cases, rumors fail to materialize into public announcements. It turns out that short selling rumored acquisition targets is, in fact, a profitable strategy.
How profitable? Well, the average return to a shorting rumor strategy over this period is 4.2% (above index) and when one restricts this strategy to only include "hot" M&A years and exclude extremely large mega cap firms, profits increase to 12.7% (again, above index). You can read their article here.
We implemented this strategy on Yahoo (YHOO) when it engaged in talks with Microsoft (MSFT) over a possible takeover and we made 6.6% in 60 days on this trade. You can check out the closeout recommendation here.
Now, it is time to implement the same strategy on Chico's FAS (CHS). The stock has increased by 10% over the past two weeks on pending rumors that it is a potential takeover target by a private equity fund.
We will short CHS at the current price of $11.7.
I will maintain timely updates on this trade.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CHS over the next 72 hours.
