A proven stock market strategy for spotting takeover candidates

Over the years, we’ve recommended many stocks that have been taken over for big profits. In fact, some readers of our newsletters and investment services tell us that they never had a stock taken over at a profit until they began following our advice.

(To get all the details on our stock market strategy, and how it can help your portfolio, don’t miss our free report, “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada.” Click here to download your copy and get started right away.)

More on the stock market strategy that helps us routinely spot takeover candidates a little further on. But first, here are just a few recent takeover targets we’ve recommended. All rewarded our readers with big gains:

A history of huge profits in takeovers

• Fording Canadian Coal jumped 163.2% in five months on a takeover offer after we recommended it to Successful Investor readers in January 2008.
• In April 2006, we issued a “buy” recommendation on Sleeman Breweries at $11.40 a share. In August 2006, Sleeman accepted a $17.50-a-share all-cash takeover offer from Japan’s Sapporo Breweries. That’s a gain of 56.4% in just five months.

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• Another of our recommendations, Alcan, jumped 68.7% in just two months when Rio Tinto Ltd. made a successful takeover bid for the company after recognizing it had access to cheap electricity, a key component in aluminum production, at a time of rising energy prices.
• And most recently, in February 2009 we issued a “buy” recommendation on Petro-Canada at $28 a share in The Successful Investor. When the company accepted a friendly offer from Suncor Energy Inc. in March, it was trading at $34.68, for a 24% gain.

Like corporate acquirers, our stock market strategy focuses on hidden value

A company’s takeover prospects are just one thing we look at when we choose stocks to recommend in our newsletters and investment services. An equally important part of our stock market strategy is looking for companies with what we call “hidden value” — hidden or widely overlooked assets.

By hidden value, we mean valuable assets that are not getting the attention they deserve from investors. When a company’s assets are wholly or partially ignored or hidden, the stock trades for less than it’s really worth, so you get to buy at a bargain price.

Hidden assets offer the prospect of a takeover — and cut your risk

Companies that launch takeovers also tend to look for hidden assets. That’s why so many of our recommendations get taken over. Of course, hidden assets are no guarantee of a takeover, but they cut long-term risk, and make a takeover a lot more likely.

If a stock with hidden assets gets cheap enough, it attracts buying by value-oriented investors. Its low price may also trigger a takeover that otherwise might never have happened.

Sometimes, of course, hidden assets stay hidden for a lengthy period. But as long as a stock has more obvious appeal, such as long-term growth prospects, a reasonable per-share price-to-earnings ratio or an attractive dividend yield, you have what we call the best of all possible investment worlds: a heads-you-win, tails-you-break-even situation.

If it works out well, it can be extraordinarily profitable; if it works out poorly, you really won’t lose that much.

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