Disclaimer: in addition to publishing the Dr. Stoxx Options Letter, I also am Chief Investment Strategist for The Trader's Edge, published by Street Authority. BLDR was one of my picks for that letter's April 6th edition.
Before the bell on Monday, Apirl 13th, Builders FirstSource (BLDR) made a huge announcement. The regional supplier of building materials for the home construction industry (think of it is a very small Home Depot or Lowe's) said that it is acquiring privately held ProBuild Holdings, LLC, for $1.63 billion in an all-cash deal. Unlike most strategic acquisitions of this type, this very smart purchase of the nation's largest transporter of home construction materials will immediately add $4.5 billion in annual revenues to Builders FirstSource, for a combined sales flow that will nearly quadruple its current level! More importantly, according to Investors Business Daily, the ProBuild purchase is expected to add up to $200 million to Builers FirstSource's bottom line, an increase of nearly 1100%!
Not only is this deal immediately accretive, it will also allow Builders FirstSource to leverage the current resurgence in home construction by expanding its footprint in the U.S, making it a true national supplier. It will also allow Builders FirstSource to ramp up growth in some of the higher-margin products that ProBuild specializes in. All good things that should keep BLDR high on analysts' list of favorites for years to come.
In fact, investors loved this news so much -- and well they should -- that shares of BLDR are now trading over 80% higher than our entry price last week! I suspect we will see continue to see upside pressure on the stock for the rest of the week too. In the days ahead I fully expect to see upward price target revisions from the analysts who have been covering the company (like Deutsche Bank, Gabelli, DA Davidson, Stifel). So far, all the analyst commentary has been exceptionally bullish on the deal. And why not? It is extremely rare for an all-cash takeover to be immediately beneficial to the bottom line and even rarer to see that benefit balloon to over 1000%! Wow!
So how did I do it? How did I manage to get my subscribers in on one of the hottest momentum stocks of the year (80% in 2 days...come on!!) before the big breakout?
Now,80% 2-day trades don't happen every day, of course, and there is no magic formula for spotting them before they happen. But it tends to happen more often in stocks you own when you position yourself, as we do in the Trader's Edge, in companies that are financially sound, growing in sales, seeing their earnings estimates rise, and have strong support from the analyst community. These are the only kinds of companies that can leverage deals like this. They are also the kinds of companies that can entertain strong buyout offers too, which is another way we see returns like this manifest over time.