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5 'Special Situation' Arbitrage Opportunities For 2012

These stocks represent "special situations due to mergers, headline risk or key earnings. In this article, I analyze what investors can do to arbitrage profits from these stocks.

Motorola Mobility Holdings Inc. (MMI)
Motorola Mobility is an arbitrage play. The company has a market cap of $11.64 billion with a negative price to earnings ratio. The stock has traded in a 52 week range between $20.77 and $39.20. The stock is currently trading near the top of its 52 week range at around $39. The company reported third quarter revenues of $3.2 billion compared to revenues of $2.9 billion in the third quarter of 2010. Third quarter net income was $-32 million compared to net income of $-34 million in the third quarter of 2010.

In the third quarter, the company increased its year-over-year revenues by 10% and its net income loss was reduced by 6%. Motorola Mobility began trading on the NYSE on December 21, 2010 and since that time the stock price has risen by 40%. On August 15th, Google announced that it would acquire MMI for $40 per share. On the day of the announcement, the stock price increased by 55% from $24.47 to $38.13. Since the date of the announcement, the stock price has been flat. MMI’s stock price is very unlikely to rise above $40, but could take a big hit, if the acquisition does not go through. At a price of around $40, MMI is a nice arbitrage play as the deal comes to a close.

News Corporation (NWS) NWS is an event-driven play on the 2012 election. NWS has a market cap of $45.27 billion with a price to earnings ratio of 17.63. The stock has traded in a 52 week range between $13.83 and $19.08. The stock is currently trading around $18. The company reported first quarter revenues for the latest period in the amount of $8 billion compared to revenues of $7.4 billion in the first quarter of 2010. First quarter net income was $738 million compared to net income of $775 million in the first quarter of 2010.

One of NWS’s competitors is Time Warner Inc. (TWX). TWX is currently trading around $35 with a market cap of $34.63 billion and a price to earnings ratio of $13.14. TWX pays a dividend which yields 2.7% versus NWS whose dividend yields 1%.

The company’s revenues and net income have been relatively flat for the last two years. The stock price is up by 11% over the last 52 weeks and 120% over the last three years. NWS investors are looking forward to 2012. In 2012, the United States will host local, state and national elections. NWS will receive many millions of political advertising dollars. I believe that the 2012 elections will be a catalyst for NWS’s 2012 earnings and several earnings upside surprises.

Mylan Inc. (MYL) Mylan is an event driven play on the approval of a key drug. The company has a market cap of $8.53 billion with a price to earnings ratio of 20.86. The stock has traded in a 52 week range between $15.49 and $25.46. The stock is currently trading around $20. The company reported third quarter revenues of $1.5 billion, compared to revenues of $1.3 billion in the third quarter of 2010. Third quarter net income was $156 million compared to net income of $143 million in the third quarter of 2010.

Mylan develops and markets generic pharmaceuticals. Mylan has increased its year-over-year third quarter revenues by 15% and its net income by 9%. The company’s stock price has increased by 1% over the last 52 weeks and 114% over the last three years. The company just got FDA approval for Dexrazoxane a chemoprotective agent. While the announcement has been made with little fanfare, investors and analysts are not appreciating the wide use of the drug. The market for Mylan's generic version of Pharmacia's Zinecard will become huge as more doctors and patients attempt to protect healthy tissue during chemotherapy. The company also has an additional 161 abbreviated new drug applications with the potential for annual sales of over $90 billion in its pipeline. Mylan has a lot of potential new drugs in its pipeline and could get a lift as other blockbuster drugs like Lipitor lose their patent protection. I think Mylan is worth taking a chance on.

InterDigital Inc. (IDCC) Interdigital is a merger opportunity play. The company has a market cap of $1.93 billion with a price to earnings ratio of 19.2. The stock has traded in a 52 week range between $34.61 and $82.52. The stock is currently trading around 42. The company reported third quarter revenues of $76.4 million compared to revenues of $92 million in the third quarter of 2010. Third quarter net income was $26 million compared to net income of $35 million in the third quarter of 2010.

One of IDCC’s competitors is Alcatel Lucent S. A. (ALU). Alcatel is currently trading around $42 with a market cap of $3.88 billion and a price to earnings ratio of 5.34. Alcatel does not pay a dividend versus Interdigital whose dividend yields 0.9%.

Interdigital primarily engages in the production and marketing of cellular and wireless products. In 2010, the company’s year-over-year revenues decreased by 22% and its net income decreased by 47%. The company earnings continued to decrease in 2011 and the third quarter year-over-year revenues decreased by 20% and net income decreased by 35%. Despite the poor earnings reports, the stock price has not been badly hurt. The stock price is up 8.5% over the last 52 weeks and 74% over the last three years. One reason that the stock price has remained steady is because Interdigital management has made it known that the company is available for sale. Interdigital has over 8000 wireless patents, and companies like Intel Corporation (INTC), Microsoft Corporation (MSFT) and Qualcomm (QCOM) have shown interest in bidding on the company. Due to IDCC's valuable intellectual property, a bid in 2012 is likely.

Talisman Energy Inc. (TLM) Talisman is an event-driven play on production numbers. TLM has a market cap of $12.33 billion with a negative price to earnings ratio. The stock has traded in a 52 week range between $10.75 and $ 25.21. The stock is currently trading around $12. The company reported third quarter revenues of $1.9 billion compared to revenues of $1.7 billion in the third quarter of 2010. Third quarter net income was $521 million compared to net income of $352 million in the third quarter of 2010.

One of TLM’s competitors is the Encana Corporation (ECA). Encana is currently trading around $12 with a market cap of $13.8 billion and a price to earnings ratio of 52.82. ECA pays a dividend which yields 4% versus TLM whose dividend yields 2%.

Talisman is a Canadian company that produces and markets oil and natural gas. In the third quarter, the company increased year-over-year revenues by 11% and net income by 48%. Most of the earnings increase came because the company doubled its production volumes of American Shale Natural Gas. The company’s stock is down by 38.8% over the last 52 weeks. The biggest reason that the stock price has gone down is because its North Sea oil project had production problems and had not met expectations. The company expects to get its North Sea project back on track in the fourth quarter. In addition, the company which has a diverse worldwide portfolio has plans to rearrange its priorities and concentrate on other profitable projects. The company’s second and third quarter earnings results showed marked improvement, which it expects to continue into 2012. In addition, the stocks evaluations (price to book ratio 1.26/price to sales ratio 1.64) are cheap.

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