Editor's Note: Investors are being treated to a huge year for buyouts and deal-making, with the numbers topping $406 billion across the market. In the red-hot games and entertainment segment, M&A activity is taking on a strategic quality that has the potential to ignite returns for investors who pick the right targets. Here to run down the best companies vying in the takeover stakes is Bill Patalon…
I'm going to start by letting you in on a simple-but-powerful investing secret.
And that secret is this: Never buy a company's stock just because you're betting on a buyout.
That's a poor, poor bet.
Now, if you have a stock where you've identified multiple potential catalysts – and a buyout is one of those possible big-gain triggers – that's a different story.
And today we're going to tell you about two stocks where a buyout is one of those potential big-profit triggers.
So let's get started…
Two Stocks, Three Reasons to Buy
The two stocks in question are mobile-gaming stocks Glu Mobile Inc. (Nasdaq: GLUU) and Zynga Inc. (Nasdaq: ZNGA).
Glu Mobile doubled in just two months after Small-Cap Rocket Alert Editor Sid Riggs gave it to us back on May 16, 2014. In fact, in an update back in July, Sid shared the fact that he was telling his subscribers to sell half their stake, letting the remaining half ride with no trailing stop – a strategy known as a "free trade."
It was a timely call by Sid – the stock sold off after that – but Sid recommended folks hold onto their shares. The reason: The mobile-gaming market is scorching hot, and Sid believed Glu Mobile would come back.
This, too, proved to be a great call by Sid.
Glu Mobile's shares have come roaring back – and there looks to be plenty of upside to come.
We recommended Zynga back on May 18. It's a new recommendation, but it's one we also like very much.
Each of these stocks is poised to benefit from some unique catalysts. But there are three the two companies share:
Buy Reason No. 1: These two companies serve a hot market. We've detailed the allure of the mobile-gaming market, which this year will leapfrog consoles to become the biggest slice of the gaming market.
Both Glu Mobile and Zynga are key players in this market, and both are using a "freemium" strategy that's become the best way to market mobile games.
Buy Reason No. 2: Both firms understand the need to evolve. In my years as a business journalist, I learned the lesson that firms that don't advance – by definition – fall behind. Both are evolving, adding new games and taking the structuring steps needed to succeed.
Buy Reason No. 3: Both could end up as buyout plays. The mergers-and-acquisitions (M&A) market is as hot as it's been in years – in many, many sectors. Companies have lots of cash or can access it cheaply. They see the advantage in "buying" market share and in achieving "scale" – corporate-finance lexicon for becoming big enough to apportion your costs over a much bigger slug of revenue.
Private Briefing subscribers have benefitted – 13 of our recommendations have become "deal stocks," most netting you big gains. Don't be surprised if Glu Mobile or Zynga joins that club – either buying a rival as a catalyst for renewed growth or serving as a buyout play themselves. Glu Mobile, in particular, is intriguing: As we told you in late April, Chinese Internet up-and-comer Tencent Holdings ADR (OTCMKTS: TCEHY) has taken a 14.6% stake in the company.
We'll talk about some of the other catalysts another time. But today, we'll focus on explaining why a buyout of one or both of these companies is very possible.
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.
I was wondering about your recent strategy of buying the second "tranche" at a price 25%
less than what you paid for the initial stake. At the same time you are recommending we employ a "25% trailing stop" on all holdings. If we follow your advice then the initial stake goes down 25% and is sold by the trailing stop. Then we buy the second tranche at the price 25% below what we paid for the initial stake. It seems to me that we wind up with the same initial holding but already employ a 25% loss on the first purchase which is sold as a result of the trailing stop. How can you buy a second tranche at 25% below the first tranche when you are unloading the first tranche because it has dropped 25%?