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One of the biggest considerations in a corporate takeover is the price of the acquisition target. If the company is too highly priced by the market, it will have difficulty finding a buyer.

Therefore undervalued companies tend to be the targets of M&A. We ran a screen with this idea in mind. We began by compiling a list of rumored potential takeover/leveraged buyout (LBO) targets from various sources including Bloomberg Businessweek and Wall Street Cheat Sheet.

We then screened this universe to find those stocks that appear undervalued relative to the Graham Number, a measure of maximum fair value created by the "godfather of value investing Benjamin Graham."

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

We then screened for those with recently strong performance, rallying above their 20-day, 50-day, and 200-day moving averages. This indicates that market sentiment on these names is currently strong.

‪Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.‬

Do you think these names are likely takeover candidates? Use this list as a starting point for your own analysis.

1. Gannett Co., Inc. (GCI): Operates as a media and marketing solutions company in the United States and internationally. Market cap at $3.65B. Price at $15.20. Takeover/LBO rumor sourced from Wall Street Cheat Sheet . The stock is currently trading 0.70% above its 20-day moving average, 2.12% above its 50-day MA, and 21.95% above its 200-day MA. Diluted TTM earnings per share at 1.89, and a MRQ book value per share value at 9.82, implies a Graham Number fair value = sqrt(22.5*1.89*9.82) = $20.44. Based on the stock's price at $15.4, this implies a potential upside of 32.7% from current levels.

2. Kulicke & Soffa Industries Inc. (KLIC): Designs, manufactures, and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits, high and low powered discrete devices, light-emitting diodes, and power modules. Market cap at $932.56M. Price at $12.43. Takeover/LBO rumor sourced from Bloomberg Businessweek. The stock is currently trading 3.57% above its 20-day moving average, 7.33% above its 50-day MA, and 25.70% above its 200-day MA. Diluted TTM earnings per share at 1.62, and a MRQ book value per share value at 6.55, implies a Graham Number fair value = sqrt(22.5*1.62*6.55) = $15.45. Based on the stock's price at $12.65, this implies a potential upside of 22.15% from current levels.

3. SunTrust Banks, Inc. (STI): Operates as the holding company for SunTrust Bank, which provides various financial services to consumer and corporate customers in the United States. Market cap at $13.09B. Price at $24.09. Takeover/LBO rumor sourced from Business Insider. The stock is currently trading 2.02% above its 20-day moving average, 6.30% above its 50-day MA, and 16.43% above its 200-day MA. Diluted TTM earnings per share at 0.94, and a MRQ book value per share value at 36.98, implies a Graham Number fair value = sqrt(22.5*0.94*36.98) = $27.97. Based on the stock's price at $24.28, this implies a potential upside of 15.18% from current levels.

Written by Alexander Crawford. BVPS and EPS data sourced from Yahoo! Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Rallying Takeover/LBO Targets Undervalued By The Graham Number