3 Top Analyst Buyout Picks and the Best Way to Profit

by: Simon Monger

Nanometrics Inc. (NASDAQ:NANO), Cymer Inc. (NASDAQ:CYMI) and Peet's Coffee & Tea Inc. (NASDAQ:PEET) are three analyst stock picks for a near-term buyout. In this article, we'll take a look at the justification for these beliefs, as well as the best way to profit from a potential transaction using options.

Nanometrics Could See a $26/Share Buyout

Nanometrics Inc., a supplier of advanced process control metrology systems used in the manufacturing of semiconductors, solar photovoltaics, LEDs and other industrial uses, was recently mentioned as a potential takeover target by Pacific Crest. The analyst suggested that the company could be an attractive target with its high-growth optical critical dimension and UniFire platform product lines.

Pacific Crest believes that the advanced process control company could be an attractive target for companies like Applied Materials Inc. (NASDAQ:AMAT), Lam Research Corp (NASDAQ:LRCX), Tokyo Electron or Rudoloh Technologies Inc. (NASDAQ:RTEC). Meanwhile, the analyst believes that a potential deal could value the stock at around $26.00 per share – a significant 62% premium over the current market price of $16.04 per share.

Cymer Could be Bought Out by ASML Holding

Cymer Inc., a supplier of light source systems used in making semiconductors and chips, was recently mentioned as a potential takeover target by Pacific Crest. The analyst suggested that the company could be a target for ASML Holding (NASDAQ:ASML), noting that EUV lithography is an important area for ASML Holding moving forward.

As far as a price target, Pacific Crest believes that the acquisition could prove expensive and ASML Holding may be forced to pay around $65.00 per share for the buyout – a significant 33% premium to the current market price. Meanwhile, the company's improving second quarter revenues also bode well for the potential acquisition price and timeline.

Peet's Coffee Could Command a 12x Multiple

Peet's Coffee & Tea Inc., a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea, was recently mentioned as a potential takeover target by Gabelli. The analyst suggested that the company could be a solid takeover target after J.M. Smucker's (NYSE:SJM) recent acquisition of Rowland Coffee, since it is significantly more valuable with solid brands.

Gabelli believes that the coffee company could see a multiple of 12x or more for its specialty business. Meanwhile, the analyst reiterated its $55.00 per share price target, which represents a significant 14% premium over the current market price. Again, no timeline was mentioned, but the move by J.M. Smucker's to acquire a coffee maker may prompt others in the business to do the same.

The Best Way to Play Takeovers with Options

There are two primary strategies that can be used by investors to profit from potential takeovers:

  • Straddles enable investors to profit from increases in volatility over a certain time-frame, which means they can profit from an increase in share price from a buyout or a decrease in share price from the failure of a buyout to materialize. This strategic can be employed by purchasing one at-the-money call option and one at-the-money put option, with the breakeven on either side being the strike plus or minus the total premiums.
  • LEAPS – or long-term equity anticipation securities – are long-term stock options that can be used as a cheap stock substitute. Investors looking to profit from the upside of a potential takeover, without risking as much capital as buying the underlying shares, may want to consider using LEAPS to get some leverage.

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