While most investors rightly focus on business performance or structural tailwinds in picking ASX shares to buy, there is another factor that could materially boost the fortunes of a stock.
That is takeovers.
"Identifying companies that will make suitable takeover targets can make for very lucrative investments," Wilsons equities strategist Rob Crookston said in a memo to clients.
"Normally, companies are acquired at a significant premium to their latest share price, and any hint of a possible acquisition can trigger positive momentum even before a bid is announced."
After 2022 saw many non-mining S&P/ASX 200 Index (ASX: XJO) shares fall in value, big institutional investors like superannuation funds and private equity firms are "still on the hunt for high-quality assets at a fair price".
Image source: Getty Images
Growth stocks slashed to clear
One set of companies that are "vulnerable" to acquisitions are growth stocks.
It's because they are going for cheap at the moment.
"These stocks have underperformed during periods of rising bond yields and outperformed when bond yields have fallen," said Crookston.
"2022 was no different. The quick-fire rise in bond yields was a significant headwind for growth stocks in 2022."
To demonstrate, the S&P/ASX All Technology Index (ASX: XTX) is still more than 33% lower than November 2021, despite a 10% revival this year.
Crookston noted that takeover bids have already been seen for technology shares such as Nitro Software Ltd (ASX: NTO), Tyro Payments Ltd (ASX: TYR), and ELMO Software Ltd (ASX: ELO).
The next great takeover targets?
So Wilsons analysts set out to find the ASX 200 shares that might become the next takeover targets.
"Our search is looking for more of these opportunities at the larger end," said Crookston.
"We have looked for stocks that have derated significantly over 2022 that offer substantial growth potential."
These are the seven ASX companies that Crookston's team came up with:
- Xero Limited (ASX: XRO)
- Domain Holdings Australia Ltd (ASX: DHG)
- PEXA Group Ltd (ASX: PXA)
- Netwealth Group Ltd (ASX: NWL)
- Iress Ltd (ASX: IRE)
- Altium Limited (ASX: ALU)
- NEXTDC Ltd (ASX: NXT)
The analysts said that Domain is attractive for acquisition because of its "strong market position" that's effectively a duopoly.
"Looks oversold on negative housing sentiment, but likely to grow earnings over the cycle."
Cloud accounting software provider Xero has seen its share price halve since November 2021.
"High multiple might deter but has de-rated heavily over the year," read the Wilsons memo.
"SaaS [software as a service] business with recurring revenue. Strong growth with the potential for substantial cost out."
Another software company, Altium, is undergoing some pain at the moment but will be tempting for savvy institutional investors seeking growth in the medium term.
"Transition to SaaS business causing slight disruption (margins contraction) but should be short-term," read the memo.
"High quality business that is taking market share."
