This is another in a series of video interviews in which Pat McKeough will give his advice on a variety of topics. Some will deal with his overall investment philosophy, others on specific investment strategies and still others will be comments on events that are affecting the markets and the economy. In this post he has stock market investment advice on stocks that are taken over. It’s not a guessing game, he tells viewers—there are specific qualities to look for that can point to potential takeover candidates. And Pat has recommended more than his fair share in his newsletters.

Below is the transcription of Pat’s comments.

Hidden Value and Takeover Stocks

Q: Pat, three of the stocks you’ve recommended have been taken over in the past few months—Mosaid Technologies, Gennum and RuggedCom. What’s the secret of recommending stocks like this?

Pat McKeough: The one thing we really look closely for in our organization is hidden value. I define hidden value as a potential gain that’s not really offset by a potential loss. It could be real estate that’s carried on the books at old prices that are way below current prices; it could be a large research budget that could turn out to be a great source of new products; it could be an organization that’s been working on developing a certain way of operating for a while and now is finally getting it right.

That’s the kind of thing that smart takeover operators look for. And we do the same. Other investors will sometimes follow a momentum approach; that’s when they try to buy things that are really on a roll, that are reporting great earnings increases all the time. And that’s fine, too.

But the thing with hidden value stocks is that you won’t get hurt much if the value stays hidden for another few years. But they can suddenly come into public attention and start reporting higher earnings and provide you with a big gain.

And sometimes takeover artists come along and pick them up before that happens. Either way, it can be a low-risk way to do quite well with your investments.

A Note from Pat McKeough on his Wealth Management Services

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