Last Wednesday, Zhongpin Inc. (HOGS) finalized its going private transaction, handing investors $13.50 per share in cold, hard cash.
You’ll recall, I originally put the company on your radar back in February because it represented an attractive merger arbitrage opportunity.
At the time, the stock traded for $12.85. That means anyone who purchased shares on my recommendation earned a 5.1% yield in just 135 days. Not bad, considering the average money market fund still yields less than 1%.
On an annualized basis, we’re talking about a whopping 13.7% yield. And who wouldn’t want that in this zero-yield world?
I know, I know. We can’t spend “annualized” yields. So comparing annualized yields from one merger arbitrage deal to the going rate for a money market fund isn’t truly an apples-to-apples comparison.
And to be completely honest, I loathe analysts who try to pump up their results by annualizing returns like that. So why did I just do it? To prove a point…
Shoulda Coulda Woulda
For almost a year now, I’ve been serving up compelling merger arbitrage opportunities whenever I come across them. To date, I’ve shared a total of seven. And six of them closed successfully.
I’ll share more about the seventh in a moment. For now, I want to focus on this fact: If you invested in any one of the opportunities I shared, you could have earned yields ranging from 5% to 8%. In as little as 20 days, in some cases.
Take a look:
But here’s the rub… I’m afraid most of you fall into the “could have” category. As in, you didn’t invest in the deals because they weren’t high yielding enough.
Big mistake! Here’s why…
Lather, Rinse, Repeat!
While I don’t expect you to be distressed about missing out on a single opportunity for a 5% yield, I do expect you to regret missing out on a 28.6% yield. And you just did!
You see, the power of merger arbitrage investing comes from stringing three or four deals together over the course of a year.
I’ll admit the odds of that happening with most investing strategies are slim to none. When it comes to merger arbitrage, though, it’s a cinch!
How could that possibly be? Well, it’s not because I’m some investing genius. Far from it.
It’s simply because we’re not trying to predict the future (i.e. – whether a stock will go up or down). We already know the future in a merger arbitrage situation. We know the exact price a company is going to be bought for and when it’s going to happen.
Add it all up, and as the table shows above, if you invested in four out of the six deals I shared – and reinvested the proceeds every time – you would have earned a bona fide 28.6% yield. Total time? 306 days.
Now, if you decided to spend your income from each deal and only reinvested the principal in the next one, you still could have earned a 25.9% yield.
Better Late Than Never
I hope I’m wrong. I hope many of you did follow my lead. If so, please let me know how you personally fared by sending an email to firstname.lastname@example.org.
If not… well, what are you waiting for?
The seventh deal that I alluded to earlier wasn’t a bust that I was conveniently glossing over. (Longtime readers know that I don’t hide my mistakes.) To the contrary, the opportunity – which I shared with you back in April – is still active.
The company, NTS Realty Holdings (NLP), is set to go private by the end of the third quarter. Terms of the deal call for shareholders to receive $7.50 in cash. So if you buy the stock for $7.14 or less, you stand to pocket a 5% yield in 90 days (or less).
And since I’m certainly not going to stop looking for new opportunities, chances are I’ll have another one lined up for you to consider before the deal even closes. So what are you waiting for?
Bottom line: If you’re interested in safe yields of almost 30%, don’t be so quick to write off merger arbitrage investing. It’s a battle-tested strategy that’s been used by institutional and high-net-worth investors for decades. And there’s no reason we can’t use it, too. Starting today.
Ahead of the tape,