Investor’s Business Daily regularly carries either a profile of a company or an industry that can provide a wealth of information. These profiles are helpful tools in the search for companies and/or industries where consolidation (takeovers) is taking place. Very often you will find that IBD is profiling a company that has been on the acquisition trail itself or that operates in an industry where takeovers are taking place. Since we already know that IBD is partial to the larger, higher-profile companies, you will usually find that the companies profiled in this section are larger companies that have been buying other companies rather than potential takeover targets. But that’s fine, because by reading the profiles of companies like this, you can often get a feel for the reasoning behind the takeover trend in a certain industry. Not only that: When IBD profiles a company that has been acquiring other companies, you will often find a detailed explanation of the reasoning behind these takeovers, and on occasion the CEO of an acquiring company will offer a set of clues as to where that company might be looking for future takeover targets.
Another extremely useful aspect of the industry profiles section is a listing of companies that operate within the industry being profiled. Headlined “Who’s Who in the Group,” this list of companies provides an excellent starting point for superstock sleuths who may be seeking takeover candidates within that particular industry.
This list of industry participants is also useful because IBD will often note various takeover transactions that have recently taken place within the industry. For example, on August 16, 1999, IBD’s
industry profile was entitled: “Paper Products: Tighter Supplies, Consolidation Fuel Upswing in Long-Suffering Industry.” The story talked about the recent trend toward takeovers in the industry and contained a table of 25 companies operating within the paper and paper products industry, including three notations on takeover trans- actions involving Kimberly Clark, Boise Cascade, and Pope & Talbot.
When I encounter a story like this in IBD, my tendency is to focus on the mid-size and smaller companies in the industry, based on two premises. First, if a consolidation trend is taking place and the larger companies in an industry are getting bigger and more cost-efficient, the mid-size to smaller companies in that industry are likely to be more receptive to being acquired. Second, the smaller companies in any given industry are less likely to be overfollowed and overanalyzed by Wall Street, which increases the probability that there will be bargains among them relative to their takeover potential.
Of course, Investor’s Business Daily, which focuses on relative strength, earnings momentum, and other characteristics of stocks that are already currently in vogue and in the forefront of the market, cannot simply list the industry participants from top to bottom in terms of size, based on revenues or market capitalization. Instead, IBD lists the companies from top or bottom in terms of stock performance and/or earnings growth. The stocks, says IBD, are “ranked (not ‘listed,’ mind you, but ‘ranked’—this is Big Brother we are talking about, remember) by a combination of their earnings per share and Relative Strength rankings.”
So you will have to do a little reshuffling of the list if you want to focus on the smaller companies in the group.
But that’s a small price to pay for a very useful presentation, and I have uncovered quite a few takeover targets by reading IBD’s industry profiles section on a regular basis.