Private equity buyouts and mergers are an integral part of small-cap investing, and let’s face it, the next small-cap buyout is coming soon — big money is finding a ton of value in small companies. But that doesn’t mean you should go out and try to pick the next buyout.
As a small-cap investor, all you can do is continue to look for financially stable, well-run companies. If you can find value in promising small caps, a buyout would just prove your thesis right. As for where to look, follow Chuck Royce’s three precepts:
- Focus on small companies.
- Employ a fundamentally driven, business-buyer’s approach to small-cap investing.
- Plan on holding for five to 10 years, if not longer.
And mix those with three learnings from Motley Fool Hidden Gems
, where Tom Gardner and Bill Mann have had seven companies from their scorecard acquired (and two more in the process of being acquired):
- Hunt for cash-rich balance sheets.
- Look for top-flight managers (who preferably have an ownership stake in the company).
- Buy businesses with a wide market opportunity or a valuable product roster.