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How To Find Tempting Stock Market Takeover Targets

By Jason Markum

Investing in the stock market can be, shall we say, difficult! One way to increase your odds of success are to find companies that are about to be taken over or merged with other companies. These tempting takeover targets can pump up the stock price several points in a matter of days!

The problem is finding these companies before the takeover has been announced, which is no easy feat, let me tell you! If you don’t have a crystal ball there is not a lot you can do to find them… or is there?

One way to find these tantalizing takeover targets is to watch investors with top track records in finding them and to follow their buying patterns. You can follow the buying patterns of individual investors by following their SEC 13D filings. You can download these for free from the SEC’s website on the day that they are filed (or thereafter).

Individual investors are required to file these forms within 10 days of any purchase of 5% or more in a company’s outstanding stock. Of course, if somebody is interested in taking over a company then a 5% buy in is essential to get the ball rolling.

But that’s not an absolute clear indicator that you should follow them! You should also always analyze the companies financial statements including their balance sheets and income statements as well as their statements of cash flows so that you can determine on your own what a valid price for the stock is.

For instance, if you determine that a stock is worth $10 a share and it is already trading at $30 or $40 a share, just because somebody is acquiring large chunks of their stock doesn’t necessarily mean that the merger will add value above what the stock already trades at. So be very very careful!

Something else to watch out for when looking for target takeover is a companies tax loss carry forward. Companies that have high tax loss carry forwards may be takeover targets because that carry forward is a huge benefit to another company. Sometimes other companies will buy a company just to take advantage of the carry forward on their taxes.

Another area to watch for is a companies price to earnings ratio or PE ratio. What you are going to want to do is benchmark that PE ratio against other companies within the same industry. This will tell you if a company is undervalued or overvalued compared to other companies within its industry. As far as takeovers are concerned, it’s better to be undervalued compared to the rest of the industry. If a company is undervalued, then another company can come in and gobble them up in the hope that the merger will create enough buzz to prop the stock price up to a more reasonable level.

So there you have several ways to determine whether a company is a likely takeover target. You don’t need a crystal ball after all, just some common sense and a little technical analysis and research. Find just a few likely takeover targets and you can engineer quite a nice boost to your overall portfolio returns.

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