EOT Trade Alert – October 13, 2010

Corey Williams | October 13, 2010

October 13, 2010

Trade Alert:

Buy FRX Jan 2011 $34 Calls at $1.50 or better

Company Background:

Forest Labs (FRX) develops, manufactures, and sells branded and generic drugs. Their sales efforts are focused on their branded drugs with growth potential like Lexapro, Namenda, Benicar, and Campral.

Short-Term Catalyst:

M&A activity is juicing the valuations of pharmaceutical companies. As a result, we’re seeing drug stocks like Forest Labs break out to new 52-week highs.

Here’s a perfect example…

Earlier this week, Pfizer (PFE) and King Pharmaceuticals (KG) agreed to merge. Pfizer is buying King for $3.6 billion in cash or $14.25 per share… that’s 40% higher than the previous day’s closing price!

Talk about your buyout premium!

But this is just the tip of the iceberg… There’s going to be plenty more M&A deals in the industry.

Most of the large pharmaceutical companies are in the same boat as Pfizer. They have major drugs coming off patent protection. And their drug pipelines are dwindling.

They can’t just sit around waiting for the FDA to approve their new drugs. That’s too big of a risk. They need new drugs right now to replace the lost cash flow from drugs going off patent protection.

The best way for them to rebuild their pipeline of drugs is to buy smaller companies.

Now, there’s no guarantee Forest Labs will be acquired by a bigger company. (We’ll make a killing if they are.) But even if they don’t get bought out, other M&A deals will drive the valuations of the mid-size companies like Forest higher.

Let’s grab these call options on Forrest Labs now. With M&A activity in the industry heating up, these shares are poised for a big move higher.

Trade Details:

Underlying Stock Symbol:	FRX
Current Bid-Ask Price:	$1.30 – $1.40
Option “Buy Up To” Price:	$1.50
Break-Even On Stock At Expiration:	$35.50
Maximum Risk Per Contract:	$150

Exit Strategy:

FRX is trading at $32.94 per share. Resistance levels will be at $35 and again at $40. Remember, we want this stock to move higher. Support levels will be at $30 and $27.50. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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