When I started Total Wealth I promised you three things: I'd do my best to help you identify (a) where the world's big money is moving, (b) which companies are best positioned to profit, and (c) what specific steps you can take to "get your money there first."
Today I'm going to keep that promise by showing you a simple yet potentially very profitable way to identify the next merger and acquisition candidate in any industry before it's announced. Obviously no method is foolproof, but all you have to be is "close enough" in this business when money's on the move.
It's Tuesday morning as I write and I'm looking at headlines related to two of the biggest pharma mergers announced this year. Frankly, I'm drooling in light of what I've just told you... at least mentally anyway.
Let me tell you why.
News broke Monday that Celgene Corp. (Nasdaq: CELG) is buying Juno Therapeutics Inc. (Nasdaq: JUNO) for $9 billion, and Sanofi SA (NYSE: SNY) is buying Bioverativ Inc. (Nasdaq: BIVV) for $11.6 billion. Between the two companies, that's a staggering $20.6 billion on the move in a sector projected to hit $1.2 trillion - with a "T" - by 2022.
But as great as that sounds, it's not why I'm writing today.
Anybody who's trying to profit from what was just announced has already missed the train. They're going to have to play catch-up.
My goal is to show you how to identify and profit from what happens next by getting your money there first and ahead of the next major news blast.
Here's the thing...
What most investors fail to realize is that deals like the two I've just mentioned have implications far beyond current headlines. Which means, in turn, that there's huge profit potential waiting in the wings if you know what to look for.
Mergers and acquisitions, you see, rarely happen in isolation. Instead, they produce clusters of activity as other industry players jockey for position and are forced to make acquisitions of their own to "keep up."
For example, U.S. Airways touched off a string of mergers in the airline industry back in 2005 that consolidated nine of the largest airline companies into just four... for the simple reason that fleet size, routing, and the number of landing slots determines who's king of the proverbial mountain - or the runway as the case may be.
It's the same thing in the energy business. Starting in 2015, there have been a string of mergers with stronger players gobbling up weaker players in a bid to consolidate their leadership and profitability. Examples include Royal Dutch Shell Plc. (NYSE ADR: RDS.A) buying out BG Group, and Enbridge Inc. (NYSE: ENB) acquiring Spectra Energy - which were together worth a staggering $98 billion.
Today it's pharma, where new pipelines, new drugs, and new products are critical to future cash flow. Celgene is buying Juno to compete in the oncology space against Novartis AG (NYSE: NVS) and Gilead Sciences Inc. (Nasdaq: GILD). Sanofi is buying Bioverativ to compete against Bayer AG (OTCMKTS ADR: BAYRY) and Nova Nordisk A/S (NYSE ADR: NVO) in the hemophilia space.
Other deals will follow, and that's what makes situations like this one so appealing - you will not run out of opportunities any time soon.
Long-established companies, like Celgene and Sanofi, are under tremendous pressure to replace aging treatments on a downward revenue trajectory with high-value replacement therapies worth billions of dollars. That means they have to keep buying - like a rat on a treadmill has to keep running.
To a savvy investor or trader, this is a lot like going fishing and knowing exactly where the fish are biting. Or, playing poker and knowing which players at the table have to make a move. It's information that dramatically boosts your odds of success - not to mention your profit potential, too.
Most investors, of course, will never make the connection. That's bad for them but great for you because it means you've got a tightly defined window of opportunity to buy shares before the herd arrives and jacks the price up.
Here's a simple three-step trade setup you can use to play the situation.
While there's a lot to like, I am particularly partial to the fact that the method I'm going to share with you is easy to understand and even easier to implement. What's more, you can use it in any industry where mergers and acquisition headlines heat up.
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Step 1: Find Your Headlines
Most investors read the headlines and the information in 'em goes in one ear and out the other. They don't "hear" what the news is trying to tell them - which is too bad because discovering huge profits is all about recognizing opportunity.
In this case, we're talking about two of the biggest players acting in near unison, so I need to re-emphasize: Celgene is buying Juno Therapeutics for $9 billion, and Sanofi is buying Bioverativ or $11.6 billion.
There are several key bits of information here.
First, you know exactly what sector is hot. Second, you know who's making their play. And third, you know who's got to catch up. In that sense, the headlines are a dead giveaway to where the hot money is headed next.
Step 2: Find High-Probability Targets
Most investors would give anything to have an inside track when it comes to identifying likely merger and acquisition candidates for the simple reason that putting your money ahead of the next big announcement can be extraordinarily profitable.
For example, savvy investors who had their money in Bioverativ on Jan. 19 are now looking at a quick, easy 64% pop because Sanofi's offer stands at $105 a share. That's enough to turn every $10,000 into at least $16,400 just because they had their money in the right place at the right time.
The easiest way to get in on the action ahead of time is to run a simple screen using your favorite online financial portal. It doesn't really matter whether you're partial to Google Finance, Yahoo Finance, MSN Money, or any of a dozen other sites.
What you're looking for is the ability to put in a ticker and have a list of related companies pop up when you do. Cross reference the results using a few different search engines and - voila - you've got a short list of buyout candidates.
The entire process takes about 10 minutes. From there it's simply a matter of a little homework and a few educated guesses.
On that note, let's focus on Celgene.
The company is clearly on the hunt, and my guess is that Celgene will look very closely at previously established partners with late-stage clinical trials underway that could easily be turned into blockbuster drugs producing billions in revenue. Executives don't like complicated setups, either.
I've got to imagine that Bluebird Bio Inc. (Nasdaq: BLUE) is a primary target. The company's name popped up on five of the six Internet searches I used on various financial sites as a related company or something "People Also Watch" on Yahoo Finance, for example.
That makes complete sense. Bluebird's apparently been working with Celgene since 2013 and has several late-stage clinical trials and candidates in progress for high-value drugs aimed at treating transfusion-dependent beta-thalassemia and cerebral adrenoleukodystrophy. That means it's a known quantity.
What's more, I can easily envision a bidding war developing later this year because those same areas are also product lines that would be of extraordinary interest to competitors like Amgen Inc. (Nasdaq: AMGN), Johnson & Johnson (NYSE: JNJ), and Gilead.
That means there's likely to be plenty of interest and some terrific profit potential for any investor who gets his or her money "there" ahead of time.
Step 3: Line Up Your Trade
The simplest way to play a situation like this is to buy stock in the company or companies you identify as targets - in this case, Bluebird.
Or, if you're interested in something spicier and more aggressive, consider buying call options on Bluebird stock with an expiration date at least a year away; that way you're in for a fraction of the capital but still maintain the time horizon needed for a deal like this one to play out, assuming we're correct. My suggestion is the Jan. 17, 2020, $195 call options (BLUE200117C00195000).
As always, though, you don't want to bet the farm.
Buying pre-acquisition candidates is a speculative trade. As such, that means it's something you want to do in conjunction with your established investments, not in lieu of them.
The simplest way to control risk is to limit the amount of capital to 2%. That way you're still on track for ginormous profits but won't blow up your portfolio if the markets have other ideas.
I'll be with you every step of the way.
Keith regularly shares picks and strategies like this one with his Total Wealth subscribers. To make sure you get his latest recommendations delivered directly to your inbox as they're released, just click here. It's free!
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.