As investors scan the business news each morning, they often gloss past major acquisition announcements. Most deals don’t involve and don’t have much impact on stocks in your portfolio.

But such news can be a fertile source of investment ideas. You can look at these deals, including the valuations, and start to gain an idea of what it means for rival stocks. Sometimes, you’ll find a sharply undervalued rival, simply by connecting the dots.

Let me give you an example. Two years ago, I noted that ad agency MDC Partners, Inc. (Nasdaq: MDCA) may soon rally because French advertising and marketing agency, WPP Plc (Nasdaq: WPPGY), spent $540 million to acquire a rival digital-focused ad firm.

On an apples-to-apples basis, MDCA, which became a key player in digital marketing strategies, would be worth more than $30 a share. At the time, shares traded for just $11. I thought the $30 price target seemed too rich: “Frankly, I don’t see this stock going much past $20,” I concluded.  Shares eventually surged to $26 before a recent pullback to $20.

In this very same industry (digital advertising), the connect-the-dots trade has just happened again. And it all starts with the September 12, 2014 announcement that Alliance Data Systems Corp. (NYSE: ADS) plans to acquire Conversant, Inc. (Nasdaq: CNVR), a key provider of targeted digital advertising solutions. The $2.3 billion purchase price represents nearly four times Conversant’s projected 2015 sales of $670 million. Conversant has excellent industry relationships, but it is well into maturity. Sales grew around 6% in 2013 and are expected to grow less than 10% in 2014 and 2015.

Alliance didn’t overpay for Conversant. Targeted digital advertising is an important trend, and Alliance Data can use Conversant’s skill-set and tools to further penetrate its own base of marketing customers.

The deal highlights the fact that Rocket Fuel (Nasdaq: FUEL) is a remarkable bargain. Rocket Fuel also provides targeted digital ad services and after seeing its sales more than double in 2011, 2012 and 2013, analysts anticipate sales growth of at least 50% in 2014 and 2015, to around $600 million. In other words, Rocket Fuel’s sales base is likely to be almost as large as Conversant’s sales base by next year.

Yet here’s the disconnect: While Conversant is being valued at $2.3 billion by Alliance Data, Rocket Fuel is valued at just $560 million. That valuation falls to just $500 million when cash and debt are excluded. In an industry that has been steadily consolidating in recent years, Rocket Fuel now stands out as a compelling bargain.

To be sure, these two firms differ in one key respect: Conversant is profitable, while Rocket Fuel is not. The company is expected to reach break-even in the first half of 2016, but has ample cash to support the cash burn. Yet in the world of M&A, companies don’t focus so squarely on the bottom line. Instead, they want to find fast-growing companies in fast-growing niches, which is surely the case with Rocket Fuel.

Let’s look again at how other publicly-traded digital advertising firms are being valued. In light of the industry’s solid growth backdrop, and in anticipation of solid operating margins once these business models reach maturity, you would expected them to be valued for three-to-five times projected 2015 sales. Here’s how they stack on up on an enterprise-values-to-2015-sales basis.

Rocket Fuel has not yet lived up to the buzz it generated in the first few months after is September 2013 IPO. Investors expected the company to maintain nearly triple-digit growth rates, which as noted above, now look closer to 50%. Indeed, 2015 sales growth would be closer to 25% were it not for a recently-announced acquisition. As an example, analysts had previously been anticipating third quarter sales of around $110 million, but management noted in early August that quarterly sales will likely be in the $95-to-$100 million range. That would still be more than 50% greater than year-ago quarterly results.

Investors are also troubled that Rocket Fuel is spending heavily to build out is business. Yet such a move is quite logical in light of the tremendous market opportunity before the company.

Risks to Consider: Management has caught investors off guard in recent quarters with plans for higher spending. If the timeline to break-even gets pushed out further, then shares will likely be range-bound.  

Action to Take –> While the market grumbles about near-term expense issues, investors have a chance to acquire this stock at a sharp discount to industry multiples. Equally important, this is one of the fastest-growing business models in the digital advertising space — that’s a key consideration for big firms looking to make an acquisition in this niche.

In light of the fact that the digital advertising niche has begun to see M&A activity, more deals are likely to follow suit. And Rocket Fuel looks to be the best buyout target in the group. That said, investors should never buy a stock solely on the basis of buyout hopes as many rumored deals fail to materialize. Yet even on its own merits, this stock holds great appeal. A buyout would merely be a kicker to the growth/value proposition.  Simply moving up to an EV/sales ratio of 2.0, which would still be below the industry average, implies more than 100% upside for this beaten-down stock.

If FUEL does achieve its 100% upside, that momentum would be picked up by Profitable Trading’s Alpha Trader system. This system uses relative strength and cash flow growth to identify stocks that are about to jump double or triple-digits. It’s already flagged 71 stocks that gained 10% or more in just two weeks. To find out more about the ‘Alpha Score’ and get the name of the latest stocks flashing “buy,” click here.