Finding the right tech stocks to buy to play the mergers and acquisitions (M&A) market can deliver serious profits for investors.
Just look at Pace Plc. (OTCMKTS: PCMXF). The set-top box maker soared 33% on April 24 when it was acquired by Arris Group Inc. (Nasdaq: ARRS) for $2.1 billion. And pharmaceutical benefits manager Catamaran Corp. (Nasdaq: CTRX) climbed 25% in just one day after being acquired by UnitedHealth Group Inc. (NYSE: UNH).
More than $811 billion was spent on M&A deals globally in the first quarter of 2015, according to Reuters. That was the biggest Q1 for M&A since 2007. It was also an increase of 21% from 2014.
Money Morning's Defense and Tech Specialist Michael Robinson - who consistently picks solid tech stocks to buy in his investment services - has been following this trend very closely.
"I expect to see a lot more M&A activity through the end of the year," Robinson said. And he expects to see a lot of that activity among technology companies.
"That's in no small measure because of the health of the tech industry," Robinson said. "Overall, tech firms are reporting strong growth in sales, cash flow, and profit margins."
"While you can spend hours combing debt-to-equity, liquidity, and market cap numbers, finding good tech takeover targets remains more art than science," Robinson said. "It all comes down to catalysts - acquirers are looking for good fits and solid reasons to act now."
After running the numbers, Robinson says these three companies are possible takeover targets - putting them on our list of tech stocks to buy now...
Tech Stocks to Buy No. 1: Express Scripts Holding Co.
[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]Express Scripts Holding Co. (Nasdaq: ESRX) is a pharmacy benefit management (PBM) firm with a market cap near $64 billion.
It's the largest PBM in the United States by volume of prescriptions processed. The company also negotiates lower prices with pharmacies for health employers and health plans.
"The entire healthcare sector is grappling with the impact of the Affordable Care Act (Obamacare) and the mandate to drive down costs across the board," Robinson said. "That dynamic is putting pressure on pharmacy firms to lower their overhead, and M&As can bring synergies by removing redundant operations."
One reason Robinson sees ESRX as a tech takeover target is a recent announcement by Walgreens Boots Alliance Inc. (Nasdaq: WBA). Company officials said they're looking for more acquisitions to lower overhead.
Another reason is the shrinking market for PBMs. Rite Aid Corp. (NYSE: RAD) is already buying EnvisionRx, an Ohio-based PBM. And the UnitedHealth/Catamaran deal took another PBM off the market.
"That puts Express Scripts front and center," Robinson said. "Founded in 1986, the company handles some 1.4 billion prescriptions a year, with 80% of those involving lower-cost generic drugs."
ESRX opened today at $87.13, and it's up 27.6% in the last year. Analysts expect EPS growth of 13.8% and revenue growth of 3.9% in the upcoming quarter.
Tech Stocks to Buy No. 2: ON Semiconductor Corp.
Our second tech stock to buy is ON Semiconductor (Nasdaq: ON). It's a chip maker based in Phoenix, and could become a takeover target thanks to the success of the Chinese smartphone maker Xiaomi Inc.
Xiaomi was founded in 2010 and already owns 14% of the Chinese smartphone market.
"ON Semi, which was spun off from Motorola Solutions Inc. (NYSE: MSI) in 1999, supplies Xiaomi with more than 45 tech components," Robinson said. "And earlier this month, the Chinese tech firm awarded ON with a 'Best Technology Award.'"
That's not the only reason ON is one of Robinson's tech stocks to buy.
ON also develops chips that are used in vehicle safety features, and in-dash "infotainment systems." The auto industry is ON's biggest market with 32% of sales.
"By acquiring ON Semi, a buyer would also be taking advantage of ON's own recent merger streak," Robinson said. "It's made six acquisitions since 2010, beefing up its presence in sensors, microcontrollers, and power supplies."
ON stock opened today at $12.57 and has climbed 51.2% in the last year. Year-to-date it's up 26%. Sales are expected to climb 18.4% in the company's next earnings report.
Tech Stocks to Buy No. 3: Achillion Pharmaceuticals Inc.
Achillion Pharmaceuticals (Nasdaq: ACHN) rounds out our list of tech stocks to buy now. ACHN is a clinical-stage biotech company that develops treatments for infectious diseases.
ACHN stock has dipped 14% in 2015 after the company raised more than $132 million in a secondary offering in February.
"That sounds bad, but I think the sell-off increases the odds that this small-cap player in infectious diseases will get picked up," Robinson explained.
ACHN is focusing on Hepatitis C, a disease that affects 3.2 million Americans. The company has already had a major breakthrough with its leading candidate, ACH-3102. That drug combined with Gilead Sciences Inc.'s (Nasdaq: GILD) Sovaldi led to a quick cure among a small group of patients. And the treatment only took six weeks.
"The potential here is staggering," Robinson said. "Analysts say the market for hepatitis C drugs hit $15 billion last year and could climb nearly 50% to $22 billion by the end of 2017."
ACHN is a small company with a market cap of just $1.1 billion making it a prime takeover target. The only other firms with such success fighting Hep C are major players like Gilead and Merck & Co. Inc. (NYSE: MRK).
Even with the dip in 2015, ACHN stock is up 294% in the last 12 months. Shares opened today at $9.52.
Follow me on Twitter: @KyleAndersonMM
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