Buying cheap stocks, so called value plays, can be fun and profitable. This morning the investment public was made aware of a takeover bid made on July 8, 2012 for Rona shares. Lowes Cos. (LOW) made a takeover bid for Rona at $14.50 Canadian dollars per share.
Back on March 1, 2012, I highlighted two Canadian stocks that I called Diamonds in the Rough? You can read the post here. The two securities were Rona Inc. and Dorel Industries.
I have reproduced our RON model price chart, which I included in my blog, on March 1, 2012. As readers can see, Rona was hugging our EBV-3 line, using this line for support. What caught my eye was the breakdown into EBV-3 and subsequent recovery (November). This is what I call “breaking out of the blue”. I have written many times of this investment strategy and its’ profitability.
Here is our Model Price chart for RON as at February 29, 2012.
Rona Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Evaluation of Lowes $14.50 Bid
Let’s start with last night’s chart.
Rona with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of RON subsequent to this post will be maintained on Facebook, here.
As you can see from our model price chart, we have a model price, which is our fair market value, of $18.60. Next year’s model price is calculated at $20.08, which appears in our database and not on the chart above. Lowes offer is low, and the Board of Directors was right to reject the offer. In my opinion, Lowes would need to offer at least say $22 a share, which would be at EBV+2, in order to get this deal done which would be a slight premium to our calculated model price.
Well, lets’ see what happens. Since my blog on March 1, RON shares will be up some 50%! (Assuming, shares of RON trade at $14 on the open, with the $9.37 cost on the date of my original post).