Top Merger Stocks Held By Fund Managers, Mid-Q3 2018

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Includes: AABA, AET, ANDV, AXAHY, COL, DELL, ESRX, EVHC, FOX, KS, MON, NXPI, PF, SHPG, TWX, UTX, XL
by: Special Situations and Arbs
Summary

Form 13F filings show fund managers' top arbitrage stocks.

Top M&A stocks of the 40 funds I follow.

XL Group the top stock.

For as long as I can remember, I have been reading Form 13F filings from the hedge funds that specialize in merger arbitrage. Four times per year, the funds make their holdings public. I document and analyze which merger stocks the funds have bought and which ones they haven't. I then compile the top 10 stocks held in these funds and share it with the Seeking Alpha community.

My rules:

  • I only count a stock if it is at least 1% of the fund's portfolio.
  • I only include stocks that are still actively trading.
  • I only choose funds where the majority of positions are merger-related.

For the first time in almost two years, NXP Semiconductors (NXPI), Time Warner (TWX), and Monsanto (MON) aren't the leading active M&A stocks in the portfolios I track. NXPI's deal recently busted when China failed to approve it, while the latter two finally closed.

So, where have the funds put their money now? XL Group (XL) was the only stock that appeared in 70% of the funds. XL is in the process of being bought by AXA (OTCQX:AXAHY) for $57.60 in cash. The deal is slated to close later this year.

51 weeks ago, United Technologies (UTX) sealed a deal to buy Rockwell Collins (COL) in a cash and stock merger. It is the biggest-ever aerospace deal. UTX Chairman and CEO Gregory Hayes said the companies expect to complete the deal this quarter. "We believe we are down to the final stages of the process."

Top 10 Merger Arb Stocks held by Funds

1) XL Group (XL) Held by 28 Funds
2) Rockwell Collins (COL) Held by 23 Funds
3) Twenty-First Century Fox (FOX-A) Held by 23 Funds
4) Aetna (AET) Held by 21 Funds
5) Andeavor (ANDV) Held by 17 Funds
6) Altaba (AABA) Held by 14 Funds
7) Shire PLC (SHPG) Held by 13 Funds
8) KapStone Paper and Packaging Corporation (KS) Held by 13 Funds
9) Envision Healthcare Holdings (EVHC) Held by 12 Funds
10) Express Scripts (ESRX) Held by 11 Funds

When a fund makes an arbitrage stock its top holding, it signals a strong belief that the deal will ultimately close. Three funds have Aetna as its top pick as of June 30.

Top Positions among the 40 Funds

Aetna Top Position in 3 Funds
Rockwell Collins Top Position in 2 Funds
Twenty-First Century Fox Top Position in 2 Funds

Oversized Holdings

Some arb funds have continued to oversize their top positions. As of the end of Q2, there were six positions of 17% or more in a single stock.

Envision Healthcare Holdings 22% of a Fund
Aetna 20% of a Fund
Altaba (AABA) 20% of a Fund
Dell Technologies (DVMT) 19% of a Fund
Pinnacle Foods (PF) 17% of a Fund
Twenty-First Century Fox 17% of a Fund

Conclusion

While there is no substitute for doing one's own work and developing one's unique trading/investing style, looking at what some of the top hedge funds are doing with their money is quite valuable. These funds have more resources, staff and contacts that an individual investor can possibly have. As it pertains to M&A, it is wise to research the stocks held by these funds and see if they make sense as part of one's arbitrage portfolio or simply overall portfolio. I have done so for many years with success.

Author's note: If you enjoy merger arbitrage, tender offers, exchange offers, spin-offs, liquidations and odd lots, please consider following me by clicking on the "Follow" button on top of this page.

Disclaimer: The above article is intended to provide my opinion to interested readers. To the best of my knowledge, the information presented above is factual but its accuracy cannot be guaranteed. The article should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect my judgment as of the date of publication and are subject to change. Readers are strongly encouraged to complete their own due diligence on any stock or option mentioned in this article before investing. I have no knowledge of individual investor circumstances, goals, portfolio concentration or diversification. I am not a licensed investment adviser. The information contained in this article is provided for general informational purposes and is not a substitute for obtaining professional advice from a qualified person, firm or corporation. Merger arbitrage is a risky strategy because there is significant downside in the event of most deal rejections.

Disclosure: I am/we are long XL, KS, FOXA, COL, AET, SHPG, EVHC, ESRX,DVMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.