Become the Smartest Investor in the Room

By Wayne Mulligan, on Thursday, October 15, 2015

Last weekend, I went on a family trip up the coast of Maine—there’s nothing quite like New England in the fall.

Early one evening, over a cold beer and a hot cup of clam “chowdah,” we started chatting about the recently announced merger between Dell and EMC.

Given that Dell is a private company, and private companies are what I focus on for a living, everyone was curious about my opinion. Specifically, they wanted to know if I’d come up with a smart way to profit from the announcement.

But instead of pretending to be the smartest guy in the room and giving an answer, I took a sip of beer, paused, and posed a question...

This question, while simple, can consistently reveal profitable trading ideas.

A Powerful Concept

Before I reveal the question, first I’d like to prove how powerful this investment concept is with a real-world example:

At the moment, one of the fastest-growing and most valuable tech start-ups in the world is Uber, the taxi company.

Uber allows customers in dozens of countries and hundreds of cities around the world to summon a taxi via their mobile phone.

In just a few short years, it’s turned into a company worth $50 billion.

To be clear, however, Uber is still a private business—it isn’t yet publicly traded.

So even if you’d wanted to buy shares and participate in its meteoric rise, it’s unlikely you would have been able to.

But a handful of investors realized there was a different way to profit from Uber—a way in which they could participate.

You see, while privately-held Uber soared in value, a public transportation company was cratering: in less than two years, its stock fell roughly 50%.

And for investors who knew how to ask the right question, they could have predicted this drop, shorted the public stock, and made a bundle.

The Question

So what is “The Question”?

Well, it’s pretty simple, actually… it’s a fill-in-the-blank:

If _____________ wins, who loses?

Let’s try asking the question based on my previous example with Uber...

If Uber wins, who loses?

Taxi companies lose, that’s who!

But since taxi companies aren’t publicly traded, we had to find another way to make this trade work—and here’s how we did it:

Medallion Financial Corp. (NASDAQ: TAXI) is a company that provides financing for drivers looking to purchase a taxi medallion.

You see, to drive a taxi in most cities, you need a medallion. And in places like New York City, those medallions cost upwards of $1 million.

But since Uber came along, those medallions have been plummeting in value… along with TAXI’s stock price.

That’s why early TAXI short sellers are sitting on an estimated 52% gain right now.  All by asking that one simple question.

If Dell + EMC Win, Who Loses?

Now let’s go back to the conversation I was having this weekend.

The question I posed to everyone was this:

If Dell + EMC win, who loses?

The answer may surprise you...

Dell builds personal computers as well as business servers, and the company still generates most of its revenue from those business lines.

However, due to competition from companies like Lenovo, and from tablets like the iPad, Dell’s personal computer business is shrinking each year. So it needs to generate growth elsewhere… and that’s where EMC comes into play.

EMC provides storage and security solutions for businesses.

By combining the two companies, Dell believes it can leverage EMC’s reach into the corporate market to sell more servers.

And if that happens—in other words, if Dell + EMC win—who loses?

As it turns out, EMC already has a server provider that it sells to its clients:  Cisco (NASDAQ: CSCO).

For Cisco, its EMC partnership is worth billions of dollars a year. In fact, it’s responsible for a good portion of its growth.

If EMC is merging with Dell, we imagine the EMC-Cisco alliance could come to an end—and that could adversely impact Cisco’s stock price.

Private Alpha

The concept I just illustrated—using insights about private companies to drive public stock trades—is something we call “Private Alpha.”

It’s when you use information from the private equity market to make gains in public stocks.

We’ve written about this concept before—and if you’re interested, you can learn how to use three specific Private Alpha strategies in the articles below:

Private Alpha: Part I – Trading on Private Information »

Private Alpha: Part II –  Bet on the Future, Today »

Private Alpha: Part III – Publicly Traded Start-ups »

Happy investing.

Best Regards,
Wayne Mulligan
Wayne Mulligan


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Tags: Uber Private Alpha Cisco

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