Crista Huff Eyes a Trio of Takeover Targets

02/16/2018 5:00 am EST

Focus: STRATEGIES

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

I expect the S&P 500 index to trade between the recent high and low for a while, several weeks or months, before attempting new highs again; start investing your cash, suggests Crista Huff, editor of Cabot Undervalued Stock Advisor.

I’m going to personally buy on the down days and restrain myself on the up days, knowing that volatility can work in my favor. I’m adding to my favorite stocks, buying low on stocks that sold last week on stop-loss orders, and picking up a few more good opportunities. Meanwhile, if you want excitement via potential takeover stocks, here's 3 ideas to consider.

These three stocks are currently “in play,” meaning that it’s been revealed that bigger companies are interested in buying them. These are not just rumors. Meanwhile, none of these growth stocks are trading anywhere near their buyout values. I think owning these three stocks is a fantastic idea.

KLX Inc. (KLXI) — an aerospace and energy services products maker — was approached by several potential buyers in late 2017. KLX responded by hiring Goldman Sachs to handle a potential M&A transaction. Investors have short memories, and have apparently given up on a buyout offer emerging.

The share price is down with the market in recent days. KLX is expected to report 2017 EPS up 200%, followed by another 25% EPS growth in 2018. The current P/E is 16.6.


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I’m moving KLXI from Hold to Strong Buy. This is an excellent stock for aggressive growth investors, and for people who have always wanted to own a takeover stock. The odds are with you right now.The stock is rated a strong buy.

Special note: Although TiVo (TIVO) is not in our portfolio, I would note that the entertainment technology stock is in the same situation as KLX. The company revealed that potential buyers have shown an interest. The stock jumped, but investors got bored with waiting.

The stock is dirt cheap, the dividend is big, and the earnings growth is solid. Small-cap stocks can be volatile, but I see very little downside on the share price.<

XL Group (XL) is apparently also in play. The stock rose 12% on news that Allianz has shown an interest in acquiring XL Group or a similar reinsurance company, in order to expand its presence in the U.S.

XL traded below book value of about $38 in recent days, then rose to $42. According to one large investment firm, recent M&A activity in the industry took place at 1.4—1.7 times book value, which puts a potential buyout price in the range of $53-$65.

After a 2017 loss of $2.01 per share related to higher-than-normal catastrophe losses, the market is expecting 2018 EPS of $3.74. Based on a current share price of approximately 42, the P/E is 11.2 and the dividend yield is 2.1%. Whether a buyout offer emerges or not, XL is an attractive undervalued stock.

There’s price resistance at $47, where the stock last traded in July 2017. If the stock shoots up to $47 (or higher), and no buyout offer appears shortly thereafter, I would expect investors to slowly lose interest, and to see the share price recede. In that scenario, consider using a stop-loss order to protect your downside. I rate the stock a strong buy.

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