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Can the Average Investor Cash in on the Latest Mergers?

The key is to find small- and midcap companies with the best fundamentals

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Capital One Financial & ING Groep

This week brought news of another major acquisition, this time from the financial sector. On Tuesday, regulators approved Capital One Financial‘s (NYSE:COF) $9 billion offer for ING Groep‘s (NYSE:ING) ING Direct USA — an online bank. This acquisition was announced back in June 2011, but federal approval represents a significant step toward closing the deal.

Capital One has been on a buying spree lately, and this newest acquisition would make the bank the fifth-largest lender by U.S. deposits. This deal should close in the next few days, and investors responded by pushing shares of both companies up this week. Again, though, is this a good buying opportunity for either stock?

The simple answer is, I don’t think so. Don’t get caught up in the hype.

Anyone who has met me knows I steer clear of financial stocks, and these two are no exception to the rule. Just take a look at Capital One’s Report Card, then glance at ING Groep’s ratings. As you can see, both companies have a long history of earnings misses and have rightly made analysts uncertain about their earnings prospects.

No wonder both stocks have been floundering in “hold” and “sell” territory for much of the past 12 months. Currently, I consider both stocks D-rated sells, so now is not the time to add COF or ING to your portfolio.

When you own a stock involved in a merger or acquisition — or even if your stock has rumors of M&A activity — it can be like winning the lottery. I like a one-day profit of 20% or even 40%, but playing the lottery is not investing. The best way to profit from merger mania is to only buy fundamentally sound companies that would be attractive takeover targets, but aren’t depending on a takeover for survival.

The best way to find companies that fit these criteria is to use my Portfolio Grader tool to screen for the small- and mid-cap companies with the best fundamentals. In particular, you should be looking for companies with strong sales, growing earnings and big cash positions. They are the most likely takeover candidates.

Article printed from InvestorPlace Media,

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