I’d be willing to bet 95% of you get this wrong right off the bat…
Many of you will probably guess the obvious reasons first. I bet you’ll say, “They’re inexpensive and therefore I can buy more shares for the same amount of money than a large cap stock.”
Nope, that’s not it. While that’s a huge benefit, it’s not the one I’m talking about.
“They’re more volatile and make for better trading” – no.
“There’s more upside” – you’re getting warmer.
“They lead rallies higher” – nope… getting cold again.
So what am I talking about?
Penny stocks are prime targets for mergers and acquisitions.
Ah, yes… now you remember. Penny stocks are often times the subject for mergers and acquisitions for a number of reasons. Let’s take a closer look at why…
First, they’re typically less expensive to acquire due to their lower market caps. If the buyout is set up right, the buyer can get a real bang for their buck. You can easily see a company snatching up a competitor or supplier for $100 million or so. It’d be unlikely for a mid-sized company to try to buy say, IBM (IBM).
Second, many of the penny stock companies out there right now are in niche businesses. Often times, many of these companies have some type of cutting-edge technology, process, or patents that can benefit a larger organization.
They could be a competitor with a better widget, or maybe just a supplier that really knows how to get the job done right. In this case, the company doing the acquiring wants exclusive access to this company’s goods or services so that no one else can compete with them.
Can anyone say Apple (AAPL)?
You see, a merger or acquisition provides the kind of upside that no rally on the planet can. To prove my point, let me give you a real life example.
Back in early August, you could have bought shares of semiconductor equipment maker FSI International (FSII) for just $4.00 each. The stock had appeared to put in a bottom, and given the good metrics of the company, investors could expect to see the stock climb.
But then the magic happened…
Tokyo Electron (TEL) announced they entered into an agreement with FSII. TEL agreed to acquire FSII for $6.20 per share in cash, or an aggregate equity purchase price of approximately $252.5 million.
Take a look at how the stock traded immediately after the news broke…
FSII screamed higher to trade exactly at $6.20, the purchase price offered by TEL. What’s more, you can see the trading volume on the stock popped to 20.8 million shares that day. The previous day’s trading volume was just a bit more than 183,000 shares.
That’s a huge jump.
All said and done, investors in FSI International prior to the announcement reaped a one-day gain of more than 55%! No rally on the planet could have given investors results like this.
By investing in micro-caps like FSII, investors put their portfolio in position to see huge upside from buyouts like the one above. No other classification of stock offers such a high chance of seeing this type of return. It’s not like $50 and $80 stocks are being snatched up left and right for $150 a pop.
If you want to see outsized returns for portions of your portfolio, there’s no better reason to buy penny stocks than this. While mergers and buyouts are never a guarantee, your odds increase substantially when you own penny stocks.
***Editor’s Note*** If you want to buy penny stocks to profit from M&A activity but don’t know how, Gordon Lewis has created a “must read” guide showing you the secret to picking winning penny stocks. Click here to check it out.
Until next time,
Category: Investing in Penny Stocks