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Buyout Potential

Furthermore, small caps are more likely to be bought out. Since Burkenroad Reports started in 1993, we’ve had 24 companies bought out. And when they do get bought out, you’re more likely to have a fatter takeover premium. That is, whoever’s buying the company is likely to pay quite a bit above the asking price for a small-cap company. If a big company is taken over, the premium might be 20 percent. For small companies, we’ve seen premiums of 50, 60, and even 100 percent.

In August 2012, one of the companies we followed, The Shaw Group (SHAW), out of Baton Rouge, was bought out by CB&I Corporation (CBI), another engineering and construction firm. Shaw was trading at $28 a share; CB&I offered $48 a share: a 72 percent premium. A few months later, New Orleans-based McMoRan Exploration (MMR) was bought out by its former parent company, Freeport McMoRan (FCX), at almost double its pre-buyout announcement price.

These small-cap “Stocks Under Rocks” aren’t always in favor, and even good stocks will decline in value when the market takes a tumble. (As they say here in New Orleans, “When they raid the brothel, even the piano player goes to jail!”) But, eventually human nature and economics will win out, and these kinds of stocks have a lot going for them.

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