All,
I got a big surprise this week when one of my 5 stock Ports that was holding Nova Chemicals Corp (NCX) accepted a buyout offer from the Abu Dhabi investment firm International Petroleum Investment Co. (IPIC) over last weekend. The stock jumped from $1.34 close on Friday to open at $5.56 on Monday for a 315% gain! That 1 stock has the Port up 57% for the week even though the other 4 stocks are down. The stock was picked on February 17th by Filip’s Supper Value Ranking System. The biggest factor for its selection was a dividend for the year of $0.33 based on a closing price of $1.35 on Friday the 13th for a 24% yield. This has got me to thinking:
What are the best factors that might predict a stock to be a takeover target in this market environment?
This looks like an excellent time to optimize a Ranking System that looks for takeover targets. With the stock price of many very good companies well below their real value buyers will have to offer high premiums to their current price. I think that there will be a lot of activity in M&A over the next year as the market recovers.
I’ll be working on testing factors for this purpose over the next few weeks, and will post any good results here. If anyone has suggestions on factors to try please join in and let’s put the community brains together and develop a good system we can share. (Marc Gerstein ?)
Denny 
Denny,
How do you plan on backtesting this? Would you compare the stocks picked by the system to a list of companies that were taken over? Is there anything in P123 that gives us the date a company was taken over? Even if we had the take over date the system would have to predict the take over before the news was made public.
Thanks
Mark V.
Mark,
What I am doing, which is very tedious, is:
First I create a single factor Ranking System.
Next I run a 10 stock Sim with only a AvgDailyTot(60) > 500000 buy rule, and a Rank < 101 sell rule that rebalances Quarterly. This holds the stocks for 3 months and then sells them. (The Sim buys about 320 stocks over the last 8 years)
Next I check the Realized Transactions and view the charts of all stocks that had a 50% or greater gain. I look for a gap up and a later termination of that ticker that would indicate a takeover. I then save the number of stocks found by that factor. (I don’t check to see if it was actually bought since a gain of 50% in a Quarter is good enough for me no matter what caused the gain)
Next I change the factor in the Ranking System and re-run the Sim.
I hope to identify a dozen factors that seem to effect buying a takeover stock and then create a Ranking System with them.
If anyone has a simpler way PLEASE let me know!
Denny
Hi,
Denny, Congratulations, that’s a nice move. A quick unrelated question. I know that you generally use risk control, either through restrictive buy rules and/or market timing. The market is down below all moving averages, far enough that most ports with market timing rules are out of the market. A generic Filip’s Super Value port that I follow was also trending down sharply with the market. NCX was in a long severe downtrend though it had a brief bounce two weeks before the announcement.
I’m curious, why would you be in a port based on a declining ranking (although it had a BIG jump in December) and why would you be in this stock? Are you able to make money on the long side in this market?
I’ve been out of all my weekly ports since last summer, and even out of my short term port this past week due to risk controls because of the severe decline started Feb 9th.
Re. takeover targets I don’t know much about this. I would approach it from the perspective of the companies that have the pockets to do the buying, and try to determine what they would be looking for.
Don
Hello,
I found this system below and I like the concept. Basically If a stock trades at a low multiple of enterprise value over earnings, it is cheap for other companies or private equity firms to take it over. I also tried many combinations of cash to debt ratios with companies trading at low Price to earnings with no luck.
BUY: On the first day of the month, buy all stocks trading at a multiple of enterprise value over EBITDA of less than 5. Enterprise value is market cap + debt - cash.
Unfortunately I did not have much luck generating a decent return with a screen or ranking system.
http://www.stockpickr.com/analysis/The-Takeover-Targets-System/
Don,
I’m been in and out of the market a lot over the last year as my market timing Ports (using various timing rules) move in and out. The Port above has a very short market timing buy rule: benchclose(0) / sma(5,0,#bench) > 0.98 and has a Rank < 101 sell rule. It also allows stocks to be re-bought at the next rebalance.
On the week ending 02/13/09 the SMA of the S&P 500 was -1.1%, so the Port bought stocks. The following week the market SMA was down about -2.5% so it sold all stocks. As I said above, 4 were down and only the takeover stock was up. I was just lucky that I bought it! That is why I would like to find factors that would improve on the probability of my luck.
Mark,
Thanks for the link. That’s an interesting approach! Since their simulation achieved: “191 of 319 (60%) trades profitable. Average return per trade: 5.73%” It looks like this is worth looking into.
Denny
Denny & All:
One approach is to look at it as if you were the CEO of the acquiring firm. This varies by industry. For example, if you were the CEO of a big oil company you would be looking at pps/(proven reserves/shr). If you were a CEO of big pharma you might consider pps/(present value of the co.'s drug "pipeline.").
A simplifying approach might be to look at pps/(Future 5-7 year average EPS) < 4 and ROE > 25%.
-- Bill
Denny,
Are you or anyone else still investigating this concept. I’ve been looking at ranks in relation to a screen for low acquirers multiples, but the results seem counter intuitive…
Denny,
A timely post. As you may recall, nearly 10 years ago we discussed that undervalued stocks are frequently the targets of takeovers. However, with the six-year rally having progressed so dramatically (215% for the S&P500) based on nearly zero interest rates, many companies are going M&A crazy to not miss the boat, valuation be damned. After all, everyone expects that ZIRP won’t last forever and with the economy still lumbering along, borrow to grow through acquisition ASAP, right?
There is an interesting article on this very subject in this weekend’s WSJ Online: Fear of Losing Out Drives Deal Boom (Little known WSJ hack: If you get hit up to pay to read the article, Google the headline and click the top link to read the article for free. Google refused the WSJ demands to stop spidering their content, haha.)
Key quote: “Companies are merging at a pace unseen in nearly a decade. Halfway through the year, about $2.15 trillion in M&A deals or offers have been announced globally, according to Dealogic. That puts 2015 on pace to challenge the biggest year on record, 2007, when companies inked deals worth $4.3 trillion.”
Maybe ominous that 3Q 2007 was the previous all-time record. hmmmm
Chris