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Cabot Undervalued Stocks Advisor Special Bulletin

One of our portfolio stocks rose 11% this morning upon a Reuters report that private equity firms Sycamore Partners and/or Apollo Global Management (APO) might announce a buyout in February.

Today’s News: GameStop (GME) is up on buyout rumors; Bristol-Myers Squibb (BMY) agrees to acquire Celgene (CELG).

GameStop (GME) rose 11% this morning upon a Reuters report that private equity firms Sycamore Partners and/or Apollo Global Management (APO) might announce a buyout of GameStop in February. As announced in November, GameStop agreed to sell its Spring Mobile business to Prime Communications LP for $700 million. The Spring Mobile transaction was to have closed in December.

My suggestion is that shareholders hold GME and await the potential buyout announcement. Hold.

Bristol-Myers Squibb (BMY) has agreed to acquire Celgene (CELG). (Neither stock is featured in the Cabot Undervalued Stocks Advisor portfolios.) Celgene shareholders will receive one Bristol-Myers share and $50 in cash for each Celgene share held. The initial buyout price amounted to $102.43 per share. However, Celgene shareholders should be aware that as the share price of Bristol-Myers falls, the total potential buyout value per Celgene share will also fall.

Do you want to own shares of the post-merger company? BMY has slow 2019 EPS growth and a relatively low debt ratio. CELG has strong 2019 EPS growth and a very high debt ratio. Once merged with Celgene, Bristol-Myers will have a better EPS growth outlook and debt levels that are near or over the top of the range with which I’m comfortable.

Normally, when a large merger takes place, the bigger company’s share price stagnates until about six months after the transaction has been completed. At that time, Wall Street finally has a good grasp on how well the finances of the merged company are playing out. If the merger is going well, institutional investors begin buying the stock in earnest.

However, a 2019 recovery in the broader stock market could certainly lift Bristol-Myers’ share price, regardless of the state of the Celgene transaction.

Shorter-term traders should sell CELG and BMY, and move on to new opportunities. Longer-term investors should be comfortable continuing to own these stocks, allowing the CELG acquisition to take place much later in 2019.