Short of consulting a crystal ball, the best way to tell if a company’s a possible takeover target is by watching the buying patterns of investors with top track records. We track SEC 13D filings.
They’re required within ten days of a purchase that brings an investor’s holdings to 5% or more of a company’s outstanding stock.*
That’s not to say you should blindly follow. You must also analyze the company’s balance sheet and market position.
When calculating a company’s book value to compare it with its market value, research its adjusted book value – Including assets that don’t show up on the balance sheet (find them in annual report footnotes) … most commonly, an overfunded pension plan or last in-first out (LIFO) inventory reserves. Reasons: Spectacular rises in the stock and bond markets have boosted dramatically the funds held in pension plan … and if a company uses LIFO accounting procedures, its inventory is usually worth more than stated on the books.
Valuable insight can also be gleaned from an examination of the company’s securities portfolio, also listed in annual report footnotes. Question: Is the portfolio’s market value higher than its stated book value?
It’s also important to take a look at the market value of a company’s real estate holdings. Where to find them: The Company’s Form 10K, filed annually with the SEC and available from the company’s investor relations department.
You’ll have to research land values in the area…and will usually discover that the value of the property is higher than stated on the company’s books. Finally, find out from its annual report whether the company has a tax-loss carry forward that might benefit another party.
In addition to hidden balance-sheet asset, you need to know how the company is faring within its own industry. How: By comparing its price/earnings ratio with P/E’s in the rest of the industry and with the general market. That gives an idea of whether it’s fairly, over- or undervalued. Best: Undervalued.
Next area to investigate: The Company’s market share or penetration in its industry. Is it a major player or an also-ran? Always go for the major players.
*How to get 13D’s: They’re available from the SEC in Washington on the day they’re filed and in Chicago , Los Angeles and New York Washington , DC 20005
Source: William Wood, senior vice president, Street Smart, Inc., publisher of Street Smart Investing, and 13D Opportunities Report, 2651 Strang Blvd. , Yorktown Heights , NY 10598
