A recent article in The Wall Street Journal pointed out that the NFL team that is the most accurate in passing as measured by yards per attempt wins about 84% of the games. The piece, "It's How Well They Throw the the Ball," by Allen Barra stated that, "...the great ones lead the league in passing efficiency..." In stock picking, this comes from arbitrage opportunities like that now for Venoco Inc. (NYSE: VQ). Warren Buffett, one of the "great ones" when it comes to stock picking, is best known for his "long term is forever" school of investing. However, according to the book, "Warren Buffet and the Art of Stock Arbitrage: Proven Strategies for Arbitrage and Other Special Investment Situations, " from 1980 through 2003 Warren Buffett made an annualized return of 81.28% from special situations such as establishing arbitrage positions in mergers and acquisitions, corporate spinoffs and other transactions. A "special situation" for arbitrage profits that are low in risk and high in rewards, i.e., "efficiency" in stock picking, now exists for small cap investors with Venoco, Inc, an oil and gas, drilling and exploration company based in Denver, Colorado. On August 29th, Timothy M. Marquez, the Chairman of Venoco, Inc., tendered an offer to purchase the company and take it private with the issuance of the following statement: I am pleased to offer to acquire all of the outstanding shares of the common stock of Venoco, Inc. (the "Company") at a cash purchase price of $12.50 per share. I believe that this offer is fair and in the best interest of the Company and its public shareholders and that the shareholders will find the proposal attractive. The offer represents a premium of 39% over the Company's most recent closing stock price on August 26, 2011 and a 27% premium to the average closing price in August 2011. Since the tender, the price of Venoco, Inc has fallen to under $10.50 a share. After the $770.2 million offer was made, Venoco rose 31%. It was one of the most heavily traded stocks on the Big Board. Now it is an opportunity for arbitrage profits for small cap investors as Venoco has fallen along with other oil and gas stocks due to concerns about global economic growth. USO, the exchange traded fund for oil, has declined by more than 14% over the last quarter. Shares of Venoco should be bought now. If the price continues to fall, that is an opportunity to average down as there is an offer of $2 more per share on the table already by the largest shareholder and chief executive of the company. Arbitrage, long story short, is taking an advantage of inefficiency in the markets for trading and/or investing profits. If one asset is priced differently in two different markets, you buy it on the cheaper exchange and then sell at the higher price, pocketing a virtually risk-free profit. Basically, there are three types of arbitrage opportunities: when an asset does not trade at the same price on two different markets, when assets with identical cash flows do not trade at same price, and when an asset at a known price in the future does not trade at its future price discounted at the risk free interest rate. For small cap investors looking to profit from the takeover offer for Venoco, it is third opportunity. Many times after an offer is made the stock price will rise and then fall. This is due to a variety of factors having nothing to do with the merits of the bid of the quality of the company. When the bid is announced, "hot money" will jump in to grab a quick profit, then sell. This has caused the price of a company to go over the tender offer, in some cases. Other investors may decide to sell and "take the money and run," rather than wait for the higher price in the future. These all lead to arbitrage profits for investors in special situations such as Marquez's bid to take Venoco private. What makes establishing an arbitrage position in Venoco even more compelling is the likelihood of a bidding war ensuing. Over the past 52 weeks, Veneco has sold as high as $22.46 a share. In addition, major assets of Venoco, in the Monterery Shale in California and in Hastings Field in Texas, are considered to be undervalued. The Chairman attested to this is a recent speech and in company statements. As Marquez owns 50.3% of Veneco, he obviously knows a great deal about the value of the company and thinks highly of its future. So too might other major oil and gas companies such as Occidental Petroleum and Chesapeake Energy, for that matter. Each has been mentioned as a potential suitor, now that Venoco is in play. Occidental Petroleum now has the largest position in Monterey Shale. It is rumored that Chesapeake Energy has entered the area. Adding Venoco's holdings would be a nice addition for each. Needless to say, there has been a flurry of lawsuits filed, as happens with many takeover situations. The offer being made by Marquez could have attracted a number of law firms due to the price. For small cap investors seeking arbitrage profits, the presence of these lawsuits could result in the offered being sweetened. There certainly is room for upside on the offer for Veneco from Marquez based on recent takeovers in oil and gas. When BHP Billiton (NYSE: BHP) acquired Petrohawk in July and August, it paid a 65% premium. The 27% premium being offered by Marquez in conjunction with the low valuation of the assets in Monterey Shale and Hastings Field more than invites competing bids. That is why the stock should be bought now, as more bids are likely. There were over 1500 transactions in the mergers and activity field for small cap stocks in 2010. This year appears to be even stronger as the environment is even more conducive with low interest rates, easier credit, stronger balance sheets, and more cash for corporation transactions. The energy sector has been exceptionally active due to the increase in the price of oil and the increasing demands for energy from China and India. When you look at any great sports dynasty, all were based on short, accurate passing: Hopkins lacrosse, Red Army hockey, the Chicago Bulls, the Green Bay Packers, the Baltimore Colts and the San Francisco 49ers, to name but a few. Nothing was shorter and more accurate in basketball than Jabbar's sky hook! In baseball, on base percentage has proven to be three times as important as power hitting. Short, accurate passes, like arbitrage positions, allow for the action to be controlled by high reward, low risk moves. If the pass is completed, it can be broken into a long gain or a score, just like a bidding war for a stock. Small cap investors who monitor these transactions and capitalize on the opportunities for arbitrage profits could enjoy Buffett sized returns with low risks. Buffett made over 80% in trading profits while NFL teams win over 80% of their games utilizing the same tactic: short, accurate actions. The takeover offer for Venoco is a special situation for high reward, low risk; arbitrage profits like the "great ones" such as Warren Buffett and sports dynasties throughout the ages have produced. So what do you think? Are you interested, or are we crazy? You can sound off with your own opinions and feedback at the Venoco StockHQ page (and we encourage a healthy debate).