Gennum—another takeover success for our investment strategy

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One of the questions we get asked most often is how we’ve managed to recommend so many stocks over the years that get taken over.

Almost invariably, we come back to one key point. We aim to recommend stocks with hidden assets—assets that attract less investor attention than they deserve.

Hidden assets give investors a bargain. They also attract takeover bids.

Stock investment advice: These shares soared more than 100% with the takeover bid

Hidden assets played a key role in our recommendation of Gennum Corp. (Toronto symbol GND;

Gennum designs electronic equipment and computer chips that let television broadcasters store, edit and transfer video signals without losing picture quality. It also designs chips that make computer networks faster.

The week before last, with no warning, a takeover bid came from U.S.-based Semtech Corp. (Nasdaq symbol SMTC).

Gennum’s shares jumped 119% when the bid was announced. They are currently trading just below Semtec’s offer of $13.55 a share.

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Stock investment advice: Gennum built on its hidden asset throughout the recession

Gennum went through some tough times in the recession, mainly because the broadcasters who are its main customers had less money to spend. The company’s shares fell by more than $10 from January 2007 to December 2008.

The company made several adjustments. It sold off slow-growing businesses and used the cash to buy firms working in the fast-growing area of data chips for computer networks.

It also relied on its hidden asset—research and development. Throughout the recession, Gennum continued to spend heavily on research. It also continued to pay its dividend as it maintained a solid balance sheet with lots of cash and little long-term debt.

There is little doubt that Gennum’s willingness to spend on research and keep developing leading edge products played a key role in making it an attractive takeover candidate. It is clear that many investors had overlooked Gennum’s hidden asset. But Semtec didn’t.

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