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As the easy funding that fueled mega-mergers starts to tighten, companies may turner to smaller deals in order to increase earnings, according to Strategas Research Partners. It told clients to invest in some small-cap buyout candidates to take advantage of the trend.
"A combination of difficult-to-achieve earnings growth ... and bloated cash levels on the balance sheets of many big-cap companies may provide the basis for a continued storm of M&A activity in 2016," Strategas' Nicholas Bohnsack wrote in the report Thursday. "The drying up of the leveraged loan market might also make it difficult for large to buy large."
As a result Bohnsack told investors they should focus on small caps with a specific set of characteristics for investment opportunities.
"The target list of takeover candidates ... is comprised of small-cap companies that sport both strong top-line growth and below-average ROEs, potentially attractive attributes for larger-cap companies looking to grow through acquisition," the note said.
Low return on equity is a measure of management inefficiency, which the acquirer may be able to fix through cost cutting.
Here is a selection of seven stocks that made the Strategas small-cap buyout index. This is based solely on the screen, the firm has no knowledge that these companies may or may not be bought.