When a firm announces that they are being taken over or acquired by another firm, the target’s stock often jumps in price to reflect the takeover premium paid by the acquirer. This is why analysts speculate about potential takeover/leveraged buyout targets.
There are many different ways to single out potential targets, but the main goal is to find potentially undervalued companies with healthy operations. One helpful way to find undervalued firms is from the “godfather of value investing” himself, Benjamin Graham.
Graham created an equation to calculate the maximum fair value for a stock, referred to as the Graham Number. Any stock trading at a significant discount to this number would appear undervalued.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
The Graham Number only requires two data points: current earnings per share and current book value per share. The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.
We constructed a universe of rumored takeover/LBO targets from various sources, including Bloomberg Businessweek and Seeking Alpha that are currently rallying above their 20-day, 50-day, and 200-day moving averages. From this universe, we screened for those that are undervalued according to Graham’s standards.
We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.
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Do you think these companies are attractive targets for a takeover/LBO? Use this list as a starting-off point for your own analysis. List sorted by market cap.
1. Tech Data Corp. (TECD): Computers Wholesale Industry. Market cap of $2.30B. TTM Diluted EPS at $4.53, MRQ Book Value Per Share at $48.76, implies a Graham Number of $70.50 (vs. current price of $48.87, it implies a potential upside of 44.25%). The stock is currently trading at 5.05% above its 20-Day SMA, 0.50% above its 50-Day SMA, and 4.40% above its 200-Day SMA. Takeover/LBO rumor sourced from Seeking Alpha. The stock has gained 29.77% over the last year.
2. GameStop Corp. (GME): Electronics Stores Industry. Market cap of $3.85B. TTM Diluted EPS at $2.74, MRQ Book Value Per Share at $21.24, implies a Graham Number of $36.19 (vs. current price of $26.83, it implies a potential upside of 34.87%). The stock is currently trading at 1.19% above its 20-Day SMA, 1.04% above its 50-Day SMA, and 19.92% above its 200-Day SMA. Takeover/LBO rumor sourced from Seeking Alpha. Might be undervalued at current levels, with a PEG ratio at 0.81, and P/FCF ratio at 7.52. The stock is a short squeeze candidate, with a short float at 24.49% (equivalent to 7.98 days of average volume). The stock has gained 44.4% over the last year.
3. Coventry Health Care Inc. (CVH): Health Care Plans Industry. Market cap of $5.59B. TTM Diluted EPS at $3.05, MRQ Book Value Per Share at $28.81, implies a Graham Number of $44.46 (vs. current price of $37.00, it implies a potential upside of 20.17%). The stock is currently trading at 3.82% above its 20-Day SMA, 6.99% above its 50-Day SMA, and 25.94% above its 200-Day SMA. Takeover/LBO rumor sourced from Bloomberg Businessweek. The stock has had a good month, gaining 12.77%.
*BVPS and EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.