We can't escape that M&A has been the buzz lately. Is there something we should be doing as investors to that end? Not that I'm a huge fan of relying on a buyout to make some money on my stocks, but if I can pick a handful of names and even just a couple of them are acquired, I'll take a nice 20% to 30% premium on my shares. My worst case scenario is I own some good companies that don't get bought out, but are still great values.

With that in mind, below are my top criteria for spotting potential buyout candidates. Just keep in mind that there may be as much off-the-books data to incorporate as there is within the company's numbers.

Potential Acquisition Target Characteristics

1. Cash Heavy – It's a little insulting when you think about, but companies with cash on their books look attractive to private equity groups and bigger fish, because that cash may be used to help finance the leverages buyout in the fist place.
2. Lots of Inside Ownership – If a company's management stands to gain significantly from being bought out (i.e. their shares are bought at a premium), there may be a significant amount of 'help' from the top to facilitate an acquisition.
3. Low P/E – Enough said.
No debt – What good is a leveraged buyout to an acquirer if purchasing the company is going to make the buyer even more over-extended?
4. Priced at or near liquidation/book value – OK, "at or near" is all relative; stocks typically trade well beyond that level. But, to the extent that it's reasonable, the company should be priced in a way where its tangible (break-up) value is obvious, and is feasible to a potential buyer.
5. Mediocre results – Really? Yeah, that's really the ultimate goal here -- for a buyer to bring out the maximum value that a company couldn't on their own. Maybe a lack of capital, know-how, or size is preventing a smaller company from firing on all cylinders. If a buyer can take something just good and make it great, they're willing to pay a premium for the right to do so.

That's not necessarily all, but the list might get you started on your search. Admittedly, I and am worried that the mania behind M&A and LBO's could be a sign that the top is near. But, what I've noticed so far is that the market hasn't lost its head over M&A activity. Yeah, there's a lot of chatter, but I haven't heard of everybody assuming all stocks are potential acquisitions. So far, the fishing for LBO targets has been methodical. If it stays that way, then maybe the market won't get so red hot that it melts down. On the contrary, I think it may be good for stocks that there are so many value plays being uncovered.

Now, I know what you're thinking. What's a technical analyst even doing talking about finding buyout targets. Hey, money is money. But of you really must know, I think the charts are just as capable of finding buyout candidates as the fundamentals are.

Case in point: Bausch & Lomb (BOL). I bought BOL October 55 calls in early May. What prompted the trade? Bausch & Lomb was making a tepid recovery after a disastrous 2006, but it was nothing to get excited about until late March. Our internal screeners went wild a few days before we made the purchase. Things like breakout rallies, momentum growth, good volume, and crosses above resistance levels were all evident at the time. You know what we had no idea was likely? A buyout offer. That wasn't even on the radar at the time or at least not publicly.

At the time of the trade, those calls were trading at 8.10. That's pretty deep in the money, but that was the appropriate strike price for my risk profile. As of Wednesday, after the acquisition news came out, those calls are now worth 12.90 -- 59% above our entry level. That ain't bad for less than a month's worth of work.

The lesson to be learned here? Banking on a merger can be risky, because it may not happen. However, if you have a good buyout candidate with the right fundamentals along with a chart that says something is going on, you may also have an edge. Your worst case scenario is you would one and undervalue stock with some brewing upside momentum.

Price Headley is the founder and chief analyst of BigTrends.com.