Merger Monday is back. What to buy

Published Mon, Mar 30 201511:44 AM EDTUpdated Tue, Mar 31 20158:52 AM EDT

Before trading even began Monday, there were three major deals with a unit of UnitedHealth 's merging with Catamaran , Horizon Pharmaceuticals ' purchase of Hyperion Therapeutics and Teva 's takeover of Auspex . And that's not even counting Intel' s purchase of Altera , which is supposedly on the horizon according to a Wall Street Journal report Friday. Read More How a trader just made $2.4 million in half an hour All told, 2015 is on track to surpass the record set in 2014 for M & A. Through Friday, there were $414 billion worth of deals in 2015, $49 billion more than than at the same time last year, according to Dealogic. "Merger Monday" is back. Here's how to trade it. Many analysts point to M & A activity as the major reason why stocks jumped at the open Monday. Significant deal activity can often be a sign of a market top, but with interest rates still low for the foreseeable future, easily financed M & A should be a major lever (along with buybacks) to push stocks higher. Bank of America Merrill Lynch offered this to clients last week: "In large caps, we had expected a pick-up given record cash levels and the fact that investors have been agitating for companies to spend on growth rather than buying back more shares, ... Small cap M & A could be staging a bit of a comeback this year, comprising two-thirds of the 29 deals YTD. health care and tech have seen a large proportion of deals in both size segments, while financials have additionally seen a large share of the deals in small. Our biotech and banks teams expect the trend to continue." As CNBC Pro noted in February, the trend occurring this year that may add even more juice to the rally is the fact that shares of the acquiring companies are rising along with the target, which is not the norm. Read More Deal stocks rise, emboldening bankers, bull run Intel climbed Friday on the Altera report, following in the footsteps of higher stock prices from Pfizer , Expedia and J.M. Smucker following major takeovers. To ride this trend, Jefferies told clients that they should buy the chip stocks best positioned to purchase peers. NXP Semiconductors, Marvel Technology Group and Broadcom were three such companies mentioned in the report earlier this month. And if one wants to take a broader view, the purchase of ETFs where the M & A is concentrated (like the SPDR Technology Shares or the SPDR Health Care Shares ) could be prudent as the deals highlight how the stocks in the sectors (both acquirers and targets) are undervalued. But the most rewarding (and most risky) way to play upcoming M & A is to find potential targets. That same Merrill Lynch report screened for takeover candidates by looking at companies with below-average enterprise values, stable earnings, strong balance sheets and above-average long-term growth prospects. There must be something to the methodology as Altera made the list published before the news of a possible deal with Intel. The research firm sees Nvidia and Skyworks as the next two chip companies to be taken out. From health care, Merrill is eyeing Dentsply and Edwards Lifesciences as takeover candidates. On Friday, Deutsche Bank said that BioMarin Pharmaceuticals could be taken over in one year if the company gets positive results from three drugs currently in its pipelines. Outside of those sectors, Merrill sees Best Buy and Vera Bradley as attractive buys on the chance of M & A. On Thursday, Wedbush said "M & A speculation" could drive shares of Lululemon Athletica higher this year. And last but not least, the giant Kraft-Heinz merger announced last week should spark a ton more deal-making in the food sector, which is desperate for deals to cut costs and drive growth. . Read More What to buy off the Kraft-Heinz merger Janney Capital predicted that Mondelez would be next in the food space. Credit Suisse believes Campbell's Soup could be the next target for 3G Capital, which engineered the Kraft deal alongside Warren Buffett. "Valuations across branded packaged foods companies will go higher on this news," Credit Suisse wrote. One could say that about the whole market.

Miguel S Salmeron | The Image Bank | Getty Images

And that's not even counting Intel's purchase of Altera, which is supposedly on the horizon according to a Wall Street Journal report Friday.

All told, 2015 is on track to surpass the record set in 2014 for M&A. Through Friday, there were $414 billion worth of deals in 2015, $49 billion more than than at the same time last year, according to Dealogic.

"Merger Monday" is back. Here's how to trade it.