29 Jan

Buyout tryouts

29 January 2012 |
Written by Skot Kortje, Stock Trends Analyst
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Most of the buyout stocks that make it into Stock Trends portfolios are dead money - trades destined to go nowhere and a drag on long-term portfolio performance. But sometimes a buyout stock delivers.

Shares of RuggedCom Inc. (RCM-T) jumped today on news that the company's board has accepted a friendly buyout offer made by Siemens AG (SI-N). At $33 a share, Siemens' bid to acquire RuggedCom, a maker of IT equipment for the industrial sector, is $11 per share above the hostile bid previously made by Belden Inc. Siemen's offer extends a142% premium on the value of RuggedCom's stock before the Belden bid, which was then trading below $14.

Stock Trends subscribers will be interested in this development. RuggedCom is currently a holding of Stock Trends TSX Portfolio #1, bought at $25.80 in the aftermath of the Belden bid when the stock met the portfolio buy criteria on January 20. Shares of the company today closed at $32.85.

Of the 484 positions taken by the Stock Trends TSX Portfolio #1 since 1993, about 10 have been because an acquisition announcement caused the stock price to break out to the valuation level of the announced deal. Because the model portfolio is based on trend and price momentum, a few buyout stocks, like RuggedCom's, have met the trading strategy's buy criteria. Almost always these trades go nowhere, and generally are a drag on the portfolio's performance.

However, sometimes the intial buyout offer spurs other parties to make a competing offer. This, of course, is a desirable outcome for shareholders of the coveted company and can result in tidy, profitable trades - even for latecomers to the stock. But timing trades in merger and acquisition prospects is not the intent of the trend-following trading systems promoted by Stock Trends.

Although the trading strategies employed here are attempting to capture stocks that are breaking out into a new bullish trend, these buyout stocks would not pass for a proper trend trade since the end-game - the acquisition price - has already been established and disseminated in the market.

Nevertheless, the Stock Trends mechanical trading systems are strictly applied, regardless of the material news driving a move in the share price. There is no secondary evaluation of the stock's suitability. In a sense, the RuggedCom trade is a failure, as are all buyout stocks that trigger a buy signal. The trading strategy objective cannot be met - a new bullish trend will not be achieved.

That this particular trade results in a profit of significance, courtesy of a subsequent higher bid, is a bonus. A welcome bonus.

Published in Stock Trends

More in this category: « Improving signs for the stock market NYSE Bullish trend breadth turns positive »

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