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Taking Advantage of Wall Street's Free Lunch

Written by Charles Mizrahi
Posted June 6, 2017 at 4:11PM

The last place anyone should look for easy money is on Wall Street.

Many times, what seems like an easy trader really isn’t… and what looks like a slam dunk is actually a trap, ready to part investors with their money.

However, there is still one area where Wall Street is offering a free lunch… if you have patience, focus, and know where to look.

When a merger or acquisition is announced, the company that is being acquired usually sees its stock price jump higher, pretty close to the acquisition price.

Here is an example: On December 9, 2016, Sibanye Gold Limited (NYSE: SBGL) announced it was going to acquire Stillwater Mining Company (NYSE: SWC) for $18 per share in cash.

The companies said they expected to complete the transaction no later than June 30, 2017.

The trading day prior to the offer, SWC closed at $14.68 per share. It jumped to $17.32, a gain of 18%, after the merger was announced.

But wait a minute… shouldn’t the stock of SWC close at $18? Why did it close $0.68 lower than the acquisition price?

The Free Lunch

For one thing, most investors don’t want to stick around for the last few dollars or cents in a trade.

Because if the deal falls apart, SWC could easily fall back to $14–$15 per share — the pre-merger price.

It is also possible that those investors invested in the stock at $14 or lower and have already made a very nice profit.

We are willing to step in and pick up those last cents or dollars that are left in the trade, provided they pass our checklist.

We waited until it looked like the deal would pass shareholder approval as well as regulatory approval, and then we recommended SWC on February 8, 2017, at $17.22 per share, a slightly better price than where it was right after the announcement.

The difference between the price we paid, $17.22, and the acquisition price of $18.00 was $0.78 per share.

While $0.78 per share might not sound like a lot of money, keep in mind it is a 4.5% return on our investment, with very little risk.

But here’s where it gets even more interesting: If the deal closed by June 30, 2017, the annualized return would have come out to more than 11%.

That is a very attractive return considering money markets are paying close to 0%.

Here is where the returns get even better…

Instead of closing on June 30, 2017, they completed the acquisition on May 4… almost two months earlier than expected.

For the 85 days we were in the trade, we made a return of 4.5%, or an annualized return of 19.5%... just for having the patience to sit in the trade and do nothing.

We recently closed out a trade that returned 16.8%, and the annualized return for the 105 days we were in the trade came out to 58.4%!

Once you see the types of deals we select, I’m sure you’ll agree with me that Wall Street is offering a free lunch for those who know where to look and have the patience to wait.

You can find more free lunch deals like these and insight into our trading strategy right here.

All my best,

Charles Mizrahi signature

Charles Mizrahi

Twitter: @IWPeditor

Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street.

And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters.

Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.

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