How Institutional Investors Handed Me An 87% Profit

| July 29, 2010 | 0 Comments

Big news yesterday from the recently comatose M&A front.  Private equity firm, Vestar Capital, is paying big bucks for Health Grades (HGRD).

Health Grades is the leading health care ratings organization in the U.S.  They provide quality ratings on every hospital, nursing home, and physician in the country.

The company’s growing by leaps and bounds thanks to their website. pulls in a whopping 23 million unique visitors every month.  And these visitors are driving white hot advertising and subscription revenue growth.

Here’s the skinny on the deal…

Vestar is going to buy Health Grades for $294 million in cold hard cash.  That works out to $8.20 per share.  A 29% premium to the stock’s closing price on Tuesday of $6.34.

An all cash tender offer will be made to shareholders no later than August 10th.

So, what’s the big deal?

This story is a great example of what can happen when you invest in small cap stocks.

Back in February I recommended Health Grades to subscribers of my Penny Stock Breakouts advisory service.  I believed the shares offered huge upside potential.  You see, Health Grades was a perfect example of the kind of small cap company I love.

Strong growth with a significantly misvalued stock price.

Check out these stunning five year growth rates.  Revenue increased 35% annually.  And earnings grew an impressive 28% a year.

And the outlook for 2010 was also very good.

Revenue was expected to jump 20%.  And analysts were forecasting eye-popping earnings growth of 27%.

But the shares were badly misvalued by the market.

At a price of $4.34, Health Grades was trading at just 15.5x the 2010 earnings estimate.  That’s a PEG ratio of 0.57.  In other words, the stock was trading at a 43% discount to the projected earnings growth rate.

I knew these shares wouldn’t stay down for long.

Investors would surely send them rocketing higher in no time.  And that’s exactly what happened.

I recommended Health Grades in early February at $4.34 per share.  The shares immediately took off.  Over the next three months, they climbed in a strong uptrend.

The shares blew through my price target of $7.00 in early May.  In my mid-month update, I told subscribers to sell half their position.  Many of them booked gains of 60% or more!

With the market declining sharply, I made certain my subscribers took some profits off the table.

However, I believed Health Grades had more upside potential.  So I also recommended holding onto half the position.  It turns out this call was spot on as well.

When news of the acquisition broke yesterday, the shares soared more than 28%.  I immediately put out a sell alert to subscribers.  The shares were trading at $8.12 which gave us an impressive 87% gain!

Not too shabby.

Here’s the key…

When you buy fast growing small-cap stocks with misvalued prices, good things can happen.  Misvalued companies are prime M&A targets.  And buyout firms often pay hefty premiums for solid growing companies.

That’s exactly what happened with Health Grades.  And that’s how institutional investors handed my subscribers and me an 87% profit in just six months time.

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Category: Penny Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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