These Shares Could Have Plenty of Upside Ahead

Last week, I emphasized that despite the market’s recent setback, the U.S. economy is in overall good shape.

Turns out I’m not the only one who “gets” the economy’s fundamental strength.

The United States’ 3.9% economic growth is fueling a historic boom in mergers and acquisitions (M&A). In fact, a recent report from Dealogic pegs the value of U.S.-targeted deals so far this year at nearly $1.7 trillion – 45% higher than last year’s pace.

[ad#Google Adsense 336×280-IA]This represents the biggest nine-month period ever for domestic M&A and accounts for fully half of the $3.4 trillion in global deals.

You can credit the robust pace of American M&A to the fact that our economy is expanding while Europe’s stagnates and China’s growth rate cools.

Plus, with the U.S. Federal Reserve keeping interest rates near zero, companies are finding it cost effective to borrow the capital needed to finance takeovers.

And here’s what’s really exciting…

There’s one tech-related area that’s particularly attractive to investors right now.

And it’s an industry that Wall Street had all but written off just seven months ago.

Today I want to show you how to profit from the current M&A boom by using a tech investment that history says is all but certain to beat the market over the next two years…

The Real Driver

Wall Street never tires of overreacting to the slightest negative news.

We saw it happen this past February when Washington began cracking down on “tax inversion” deals.

In a tax inversion, a U.S.-based company buys a foreign one in a country where corporate taxes are lower. Then the company “moves” its headquarters there (on paper).

Tax inversions became popular among biotech and drug firms partly because they lower a company’s corporate income taxes.

To hear mainstream analysts tell it, tax breaks are the only reason inversions became popular. But that’s not true.

The other reason American biotechs seek to buy foreign firms is because many of those offshore companies happen to have a deep pipeline of new drugs.

In fact, in a conversation we had here on Feb. 20, I said the desire to save on the expense of bringing new drugs to market – a process that can take a decade and cost $1 billion – would continue to drive drug and biotech M&A.

Which is exactly what occurred….

A recent report from Thomson Reuters puts health-related deals, including biopharmaceuticals, medical devices, and insurance firms, at the top of the M&A heap for the first half of this year, the last period for full data in this sector.

All told, those health-related mergers totaled roughly $254 billion in the period – 25.2% of all American M&A.

The fourth quarter will finish strong as well.

Consider that on July 27, generic drug leader Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) agreed to pay some $40.5 billion to acquire the generics business from Allergan Plc. (NYSE: AGN).

We’ll see more of this going forward as biopharma companies use M&A to bolster pipelines, cut costs, and expand their geographical reach.

How to Play It

For the best way to profit from this unstoppable trend, look no further than SPDR S&P Pharmaceuticals (NYSE Arca: XPH).

This is an exchange-traded fund (ETF) that offers investors a great cross-section of the health and biotech industries, including global giants and small caps alike.

Don’t worry about the fact that this is not a “pure” M&A fund. This ETF still profits from mergers and buyouts because the companies in the portfolio all stand to benefit from the M&A wave.

And when those firms benefit, XPH and its investors benefit right along.

What’s more, XPH holdings can be buyers or sellers, and the fund gains from the profits these transactions bring – either way.

For instance, XPH holds Allergan, whose stock rose roughly 10% in the two days after the Teva deal was announced.

Cream of the Crop

XPH holds a total of 40 stocks with an average market cap of $36.3 billion.

Its holdings include…

  • Akorn Inc. (Nasdaq: AKRX) is a product-rich niche pharmaceutical firm that offers both generic and branded drugs. With 87 drugs on file with the U.S. Food and Drug Administration, Akorn addresses a market of roughly $8.7 billion.The company’s philosophy is one of “transformation through acquisitions.” In fact, Akorn spent roughly $1.1 billion in 2013 and 2014 to buy Hi-Tech Pharmacal and VersaPharm, moves that added 70 new drugs to its portfolio.
  • Mylan NV (Nasdaq: MYL) brings a bit of drama to XPH. The company is pursuing a hostile takeover of Perrigo Co. Plc. (NYSE: PRGO). In August, Mylan’s shareholders approved taking the company’s $35.6 billion bid directly to Perrigo investors. Ironically, Mylan has taken advantage of laws in its home country, the Netherlands, to fend off a $40 billion offer from Teva.
  • Merck & Co. Inc. (NYSE: MRK) is a global biopharma giant and has been active in the M&A scene over the last couple of years. In December 2014, Merck announced the purchase of Cubist Pharmaceuticals Inc. for $8.4 billion. The move followed a decision just six months earlier to sell its consumer unit to Bayer AG (OTCMKTS ADR: BAYRY) for $14 billion.
  • Jazz Pharmaceuticals Plc. (Nasdaq: JAZZ), based in Ireland with operations in California, has grown quickly since getting started in 2003. Strategic acquisitions have played a major role in its global expansion. The company has licensed or acquired outright six major drugs in 11 years. It’s best known for Xyrem, a drug to treat sleeping disorders. In late 2013, Jazz agreed to acquire all of Italy’s Gentium SPA for $1 billion.
  • Eli Lilly and Co. (NYSE: LLY) is one of biopharma’s best-known firms. While known for its healthcare products for humans, the company is now moving aggressively to expand into high-margin products for animals. In April 2014, it announced the $5.4 billion acquisition of the animal health division from Novartis AG (NYSE ADR: NVS). The move makes Lilly the world’s second-largest animal healthcare business after Zoetis Inc., which XPH also holds.

Running the Numbers

Trading at $47.50, XPH is a cost-effective way to play the growth in the biotech and drug industries, not to mention the large buyouts that show no signs of slowing down.

In recent weeks, biotech and drug stocks have come under selling pressure, so you should look at XPH as a long-term play.

The most recent biotech rout began shortly after Hillary Clinton, the front-runner for the Democratic presidential nomination, issued a tweet on Sept. 21 that was critical of high drug prices.

To be sure, Clinton was reacting to a very specific incident. She was outraged that Daraprim, a drug that had been on the market for more than 60 years, went from $13.50 a tablet to $750 a dose overnight.

However, investors treated it as a “hit” on the entire biopharma industry.

Since then, XPH has lost roughly 14% of its value. But even with that decline, it’s still up 24.4% over the past two years, beating the S&P 500 Index by nearly 25% in the period.

More importantly, since bottoming out on Sept. 29, XPH has rebounded by nearly 7.8%.

And over the past five years, XPH has gained 105.4%, beating the S&P by 54%. In other words, we have solid historical data to show that savvy investors can take advantage of XPH’s recent decline to add to their profits over the long haul.

So I see plenty of upside ahead.

And that’s the beauty of a play like this. You can buy on the dips to add to your holdings – a strategy that will increase your net worth even faster.

— Michael A. Robinson


Source: Money Morning