Portfolio Manager Minyi Chen On Why Certain Companies Are Likely M&A Targets

Minyi Chen, portfolio manager of AdvisorShares TrimTabs Float Shrink ETF TTFS said he believes certain companies are more likely M&A targets than others.

According to Chen, companies with a shrinking equity float, strong free cash flow growth and low leverage are more likely to become a target because of their healthy balance sheets.

In a conversation with Benzinga Chen outlined his views on the state of M&A today.

Related: Humana Q1 Earnings Miss Expectations

BEN:  With low interest rates helping to fuel M&A activity, what’s your take on the likelihood of low rates continuing?

MC: I think it's a very dangerous topic for us to speculate on. I won't try to sound like an expert, but I think rates will remain low for some time.

One factor everybody is looking at is, outside of the United States, you look into Europe especially, there are many negative yields going on there.

Even Japan, there's still quantitative easing from the government.

So, I think there's still quite some demand from outside the country for US fixed-income assets, and that will keep the yield low.

And I think, even if Federal Reserve starts to raise rates, they'll take baby steps. We're going to see 1/8 of a percent or even 1/4 of a percent increase.

Therefore, my take is, yes, we'll continue to have a low-rate environment for an extended period.

BEN:  TTFS has a good track record. What are some companies that have done well for your portfolio?

MC: We've been on the market for over three years now. At any time, we keep 100 stocks in our portfolio. The most successful ones are easy to remember.

We have a very good experience with Apple, Inc. AAPL. We started the fund in October 2011, but we didn't put Apple in our portfolio until mid 2012, when they launched their stock buyback program, which is one of the reasons the stock has done so well.

My personal favorite is AutoZone, Inc. AZO. It's benefiting from a booming automotive market in the U.S.. Right now, there's a shortage of used cars on the market.

In addition, AutoZone has been maintaining a big buyback program and its free cash flow has been very strong as well.

BEN:  What about companies that look promising as future acquisition targets?

MC:  There are many M&A deals going on in the health care sector right now. Humana, Inc. HUM has a market cap of $26 billion. Because of its strong presence in Medicare-related business, I think this could be a very likely target of a larger insurance company.

Anthem, Inc. ANTM, a huge insurance company, only has about 3 percent of its revenue from Medicare-related business.

As Baby Boomers reach retirement age, estimates are another 15 million retirees will start to enroll in these Medicare programs.

Another (promising M&A target) is Zoetis ZTS. Actually, there was a rumor reported by the media last year in November that Bayer AG BAYRY was considering a bid for that company.

Valeant Pharmaceuticals International, Inc.VRX may also consider buying Zoetis. So, Zoetis is definitely one of the candidates to be purchased by another larger pharmaceutical company.

In tech, SanDisk SNDK has been rumored to be targeted by larger companies like Western Digital Corporation WDC.

Western Digital is in the business of making computer hard drives, and SanDisk is a very strong manufacturer in the flash memory business.

I think the most important factor is that all these companies generate enough free cash flow to support these buyback programs.

Related: SanDisk Is An 'Excellent' Takeover Candidate, Bernstein Analysts Argue

BEN:  Finally, what’s the origin of the name “Trim Tabs?”

MC: This is actually a commonly asked question. A trim tab is a small device connected to the rudder of a ship. When you try to change the direction of the ship, the trim tab turns the rudder to change the direction of the bigger ship.

We are a relatively small-sized company, but we want to be the one that knows first when the “big ship” moves.

At the time of this writing, Jim Probasco  had no position in any mentioned securities.