Big Potential: 7 Takeover Targets

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 |  Includes: ATHN, CERN, CHTP, EM, HH, QSII, THC
by: Rougemont

Another round of major buyout deals were announced this week. The deals were in a wide range of industries and totaled many billions of dollars in value. The healthcare sector has been outperforming other sectors this year and looks likely to continue doing so. With that in mind, it makes sense to consider healthcare stocks now that we have seen a market correction. This sector is likely to be one of the first to rebound. The companies discussed here are potential takeover targets but all of them have tremendous upside potential whether or not they are acquired. There are many major corporations with loads of cash on their balance sheet and they need to provide growth to their shareholders. With cash earning very little returns in this economy, this has led many companies to seek acquisitions that could boost their earnings and increase their stock price. Below, I detail why these healthcare stocks could be poised for major gains in the near future. Here are the stocks that have huge potential whether they remain independent or get a a buyout offer:

Emdeon, Inc. (NYSE:EM) is trading around $13.73. Emdeon provides revenue and payment management systems for healthcare companies. These shares have traded in a range of $9.95 to $16.83 in the last 52 weeks. The 50 day moving average is $15.40 and the 200 day moving average is $14.01. Emdeon is estimated to earn about $1.02 per share in 2011 and $1.14 in 2012.

Why Emdeon shares could surge higher: This stock has come down with the markets and is now resting near a major support level of $14, which is right around the 200 day moving average. These shares could bounce off of these low levels.

An analyst at Caris believes EM could be bought by United Health (NYSE:UNH).

Hooper Holmes (NYSEMKT:HH) is trading for about 70 cents. Hooper Holmes offers health exam and other medical services, which are often used by insurance and other companies. The company's "Portamedics" division is one of the largest paramedical exam services with 140 branches and about 9,000 examiners nationwide. It offers lab services through its "Heritage Labs" division. HH insiders have made repeated purchases and hold a significant stake in this company. This company has a rock solid balance sheet with no debt and about $20 million in cash, which works out to be about 28 cents per share. Hooper Holmes has about $165 million in revenue and yet the current enterprise value is only about $28 million. The book value is 63 cents per share so it is cheap based on that metric as well. The company website states, "With over 250 locations and more than 9,000 examiners we can administer a medical exam anywhere in the U.S. Each year we deliver more than 2.3 million medical exams and process about the same number of samples in our laboratory."

Why Hooper Holmes could surge higher: I believe Quest Diagnostics (NYSE:DGX), which also provides similar testing and other healthcare services, would make a good fit as a possible acquirer of Hooper Holmes. Even without a buyout, these shares are still too cheap and as financial results turn more profitable, (HH reported profits of 2 cents per share in 2010), this stock could see significant upside. These shares used to regularly trade between $4 to $9 per share before the financial crisis, and I think insiders are likely aiming to get the shares back to those levels over time. (Especially since they collectively own a few million shares.) Also, HH brought in new management not too long ago, which could act as another upside catalyst. You can see the insider buying by scrolling to the bottom of this link. I think these shares could double from current levels based on the cheap valuation to about $1.50 per share and then possibly double from that level to about $3, if the company receives a buyout offer, or if management brings profit levels up. Heartland Advisors, Inc. (which is run by famed value investor Bill Nasgowitz) is reported as owning a very significant stake of about 13.8 million shares, which is equivalent to about 20% of the company. Heartland is well known for value investing. The Royce Funds (another value investment fund, led by legendary investor Chuck Royce) also owns about 2.4 million shares. You can see this and other significant ownership stakes here.

Chelsea Therapeutics (NASDAQ:CHTP) is trading around $4.95 CHTP is a biotechnology company, based in North Carolina. These shares have traded in a range of $2.73 to $8.20 in the last 52 weeks. The 50 day moving average is $4.41 and the 200 day moving average is $4.99. CHTP is estimated to lose about 86 cents per share in 2011.

Why Chelsea shares could surge higher: Chelsea is pursuing an orphan drug strategy for a drug called Northera (Droxidopa), which is for the treatment of hypotension. (Yes, that's Hypotension, not hypertension.) This treatment has been approved and marketed in Japan for over 15 years, and generates about $50 million in revenue in that country. You can read more about this and other key products in their pipeline here. Chelsea is expecting to ask the FDA for approval on its Northera drug in the next couple quarters. Recently Chelsea released positive data on this drug and this caused an analyst to raise the price target to $18. I first started writing about CHTP when it was around $4, but still like it at about $5, and believe it could be a takeover target. The $18 price target would be a great percentage gain from these levels whether it happens due to a buyout or organically.

Athenahealth, Inc. (NASDAQ:ATHN) is trading around $40.03. Athena provides billing and claim management systems for healthcare companies. These shares have traded in a range of $21.51 to $50.56 in the last 52 weeks. The 50 day moving average is $44.63 and the 200 day moving average is $40.84. Athenahealth is estimated to earn about 81 cents per share in 2011 and $1.09 in 2012.

Why Athenahealth shares could surge higher: This stock has come down with the markets and is now resting at a major support level of about $40, which is right around the 200 day moving average. These shares could bounce off of these low levels. In the past, some have speculated that Oracle could buy ATHN for $55. However, I think Emdeon (EM) is a much better value when you compare valuations so I don't see this stock making big gains from here unless the company receives a buyout offer. When you look at the valuations, it seems Emdeon (EM) is much more likely to receive a takeover offer.

Quality Systems, Inc. (NASDAQ:QSII) is trading around $78.76. Quality Systems provides information systems for the healthcare industry. These shares have traded in a range of $52.90 to $91.57 in the last 52 weeks. The 50 day moving average is $86.25 and the 200 day moving average is $73.77. Quality Systems is estimated to earn about $2.79 per share in 2011, and $3.41 in 2012.

Why Quality Systems shares could surge higher: This stock has come down with the markets and is now close to a major support level of $74, which is right around the 200 day moving average. These shares could bounce off of these low levels. Some analysts believe McKesson (NYSE:MCK) or Siemens might be likely to acquire QSII.

Cerner Corporation (NASDAQ:CERN) is trading around $118.02. Cerner provides information technology systems for healthcare companies. These shares have traded in a range of $72.05 to $125.91 in the last 52 weeks. The 50 day moving average is $116.20 and the 200 day moving average is $97.97. Cerner is estimated to earn about $3.62 per share in 2011, and $4.34 in 2012.

Why Cerner shares could surge higher: This stock has come down with the markets and is now resting at a support level of $116, which is right around the 50 day moving average. These shares could bounce off of these low levels.

An analyst at believes CERN could be bought by IBM. However, some think CERN is too expensive and is more likely to be using it's expensive stock as a currency for acquisitions, and I have to agree with this since the valuation is so rich for these shares.

Tenet Healthcare Corp (NYSE:THC) is trading around $6.05. Tenet runs healthcare facilities and is based in Texas. These shares have traded in a range of $3.92 to $7.70 in the last 52 weeks. The 50 day moving average is $6.62 and the 200 day moving average is $5.89. Tenet is estimated to earn about 42 cents per share in 2011, and 48 cents in 2012.

Why Tenet shares could surge higher: This stock has come down with the markets and is now resting at a major support level of $5.89, which is right around the 200 day moving average. These shares could bounce off of these low levels.

Tenet recently had a buyout offer from Community Health Systems which it rejected. I would not be surprised to see another deal come along someday.
The data is sourced from Yahoo Finance, and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for educational purposes only.

Disclosure: I am long CHTP, HH, THC. I may buy EM shares soon.