Page 438 - THE MARKET WHISPERER

434 PART 12 - Choosing a Winner Stock

acquisition or merger will succeed and that the merged companies will
be more successful, the simple fact is that the acquiring company will
show a massive expense on its balance sheets. Nonetheless, the acquired
companies were bought above market price, and will soon be traded in the
market at this premium price. Simply put, this means profit opportunities
for investors.

For example, the pharmaceutical megacorp Merck (MRK) announced
its purchase of Schering-Plough (SGP) for $41 billion, a huge transaction
by all reckonings. Schering investors would receive 0.57 shares per
Schering share they held, plus $10.5 in cash. The outcome: on the day of the
announcement, Merck’s share price dropped by 8%, whereas Schering’s
rose by 15%. I wish to emphasize, however, that even though this is highly
expected behavior on the part of both stocks, you should nonetheless
carefully check your best entry point, and the risk to reward ratio.

Staying Loyal to a Stock

Traders will often become “familiar” with stocks they feel more confident
in than with others. Each timeframe has its “stars,” stocks with prices that
are continuously trending up, drawing traders, investors and funds to buy
in for varying periods of time. Should we get to know the more popular
stocks and join the party?

First, I don’t believe in marrying any stock. Realistically, during any
timeframe, some will be defined as “wild kids” in the market. These are
traded in gigantic volumes and with crazy volatility. As I write these lines,
I can say that the two currently most popular ones are AIG and SEED. By
the time this book reaches the printer, most certainly others will be the
public’s favorites.

AIG’s story belongs to the financial crisis, that amazing crash and the
swift recovery. At such times, emotions work overtime. Some will remember
the company’s good days as a leader in the international insurance market,
and might buy AIG “for the children’s future.” Others, like us traders, take
advantage of this outpour of emotion to trade the stock through days of
fantastic volatility and high volumes.