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5 Takeover Targets Hedge Funds Are Betting On

Successful investing is about anticipating news and acting before everybody else. One of the most important news that moves stocks is takeover rumors. There are more than 300 takeover rumors every year. Stocks that are the subject of takeover rumors initially jump by an average of 2.9%, but lose 1.2% in the following month. The reason is simple: Only about 15% of takeover rumors are real and the remaining 85% are just speculation or never come to fruition. We previously discussed a strategy that will return 22% annually by shorting takeover rumors.

Shorting takeover candidates is a good strategy. However, in certain cases it may make sense to go long. We use hedge funds’ interest as a signal about the credibility of takeover rumors. Recently Stephen Mandel’s Lone Pine Capital (Stock Picks, Investor Letters) listed 7 stocks in its 2014 fourth quarter investor letter.

Lone Pine Capital 2014 Q3 Investor Letter

Lone Pine Capital is one of the most successful equity hedge funds ever. It was closed to new investors for about a decade until it started accepting new capital last year. It had around $27 billion in assets under management last year. We don’t have the latest cumulative return numbers for Lone Pine Capital but the long/short equity hedge fund has delivered around 20% annual returns since its inception 17 years ago.

We finished compiling more than 700 hedge funds’ 13F filings and ranked the 7 takeover candidates by the number of hedge funds in each stock. Cooper Companies Inc (NYSE:COO) is the least popular of these 7 takeover targets. There were 30 hedge funds with long equity positions in Cooper Companies at the end of 2014. That’s a decline of 1 hedge fund compared to the end of September 2014. Even though the number of hedge funds went down, the value of hedge funds’ positions went up by more than $250 million. Collectively, hedge funds owned 13% of Cooper Companies’ outstanding shares.

The other stock that didn’t make the top 5 was Jazz Pharmaceuticals plc (NASDAQ:JAZZ). The number of hedge funds in Jazz also declined during the fourth quarter as tax inversion-related acquisitions cooled down after the Treasury Department announced new rules. There were 32 hedge funds in JAZZ, owning less than 7% of the healthcare stock’s outstanding shares.

Here are the top 5 takeover targets identified by Lone Pine Capital and snapped up by at least 38 hedge funds:

5. CDK Global Inc (NASDAQ:CDK) is the fifth most-owned takeover target, and saw a large influx of funds and capital in the fourth quarter, coming off its split from parent company ADP (under which it was known as ADP Dealer Services) late in the third quarter of 2014. Fund ownership increased to 38 at the end of the year, from just 4, while capital leapt to $2.33 billion from just $90.95 million. Funds collectively owned 35.6% of CDK’s outstanding shares the second-highest ownership rate among all takeover targets. Those shareholders were led by Fir Tree, which owned 14.15 million shares, which in December, switched its position in CDK from passive to activist. Stephen Mandel meanwhile, owned 2.89 million shares. CDK is up 51.39% since it began trading in September.

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