The Takeover Targets System

Posted by: Pro

Updated:
07.01.07
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Description:

This is a simple long only pattern that buys stocks it believes are good takeover targets at the beginning of each month.

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.

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.

SELL: On the last day of the month if the company is taken over, or if the company no longer fits system criteria.

Backtest: Simulated on all S&P 1500 stocks from January 2000 until December 2006. Simulated using 5% of equity per trade.

Results: 191 of 319 (60%) trades profitable. Average return per trade: 5.73%

Since this system at times triggers many simultaneous buys, going forward we also filter by projected long term growth of 15%, a debt ratio of less than 0.3, revenues of over $200 Million and a market cap of less than $3 Billion.

To the left we will keep track and update monthly the stocks that meet the criteria for the system. We will update at the close of the last day of each month. If one misses the buys at the beginning of the month and wants to buy intra-month, only buy if stock is trading below its opening price on the first day of the month.