8 Stocks That Appeal to Takeover Pros

Lithium, the lightest metal, holds a vast amount of energy for its weight. That makes it ideal for batteries, like the lithium-ion ones that power your laptop and cellphone. Lithium is also finicky and highly flammable, which means rare battery malfunctions can have dramatic results. Perhaps you've seen Internet videos of combusting laptops or heard about giant recalls such as those carried out by Sony (SNE) in mid-2006, Dell (DELL) later that year and Lenovo the following spring.

Safety concerns and high cost have kept lithium-ion batteries out of cars, with few exceptions. The top-selling hybrid-electric, Toyota's (TM) Prius, uses a nickel metal hydride battery that's as safe -- and as ho-hum in capacity -- as your rechargeable AAs. A handful of car makers say they've licked lithium-ion's safety challenges with a combination of improved engineering, liquid cooling and protection circuits. Tesla's all-electric Roadster jumps from a dead stop to 60 miles per hour as fast as a Ferrari and goes more than 200 miles on a single plug-in charge. It costs more than $200,000, though. The plug-in Chevy Volt, expected in 2010, will achieve a far-saner speed and travel a shorter distance per change, but will cost an almost affordable $40,000 or so.

In the years to follow, electric car prices should plunge, and demand for them -- and for South America's rich lithium stores -- might soar. Yet shares of the companies that dominate that lithium supply carry modest prices. Chemical & Mining Co. of Chile (SQM) goes for 11 times earnings. Princeton, N.J.-based Rockwood Holdings (ROC) fetches seven times earnings and FMC (FMC) in Philadelphia, nine times earnings. All three are diversified chemical sellers with hands in agriculture, manufacturing and more.

Shares of these three companies have each fallen by half since summer, mimicking oil's price decline. Cheaper gasoline, I suppose, might make drivers less keen on paying up for electrics. It seems unlikely, though, that the batteries that have snuck into today's hybrids will disappear, or that cars won't eventually sprout plugs and need more powerful batteries. Lithium, the featherweight power plant of the periodic table, seems likely to play a role. Stock buyers can gain exposure to it at little more than the cost of a basic chemicals company.

FMC turned up recently in a screen for companies that seem cheap based on the math of takeover pros. The screen looked for low EV/Ebitda ratios. EV is enterprise value, or the cost to buy all of a company's shares and pay off its debt while applying its available cash. Ebitda is earnings before interest, taxes, depreciation and amortization -- a measure of profit potential that lends itself neatly to company comparisons. In addition to compelling valuations, all eight screen survivors have something else suitors typically find attractive: positive free cash flow. That's not to say investors ought to bet on a takeover of any of them. Rather, they might want to take over a few shares as a long-term holding.

Have a look at all eight screen survivors if you like. Run the search yourself anytime using SmartMoney's stock screener.