Datong up for sale. Markets overheating?

I don't expect it will happen too often that I write about a company in which I have recently invested on a Wednesday, and on Friday they declare that they have received an approach by a potential offeror for the company. However, that's exactly what happened with Datong this week.

As always with my stock picks, I try to buy the shares when I perceive them to be cheap, so I don't suppose it should come as any surprise when other companies recognise that this is the case and make an offer for the entire share capital.

Over the medium to long term I was hoping that Datong would become a multibagger, but if they do receive a good offer for the company then that's fine since it will inevitably be at a significant premium to the price I have been paying to acquire shares.

The share price finished Friday at 48.5p, a jump of nearly 25%. I expect that if an offer does materialise then further substantial gains are to be had, although it should be emphasised that the sale process is at an early stage and there are no guarantees that an offer will materialise.

At this stage it's impossible to say what a potential offer could be pitched at. I would argue that it's worth NAV plus a mutiple of future earnings (bearing in mind that they have just secured a £7.5m contract to be delivered over two years). In this case a price above £1 is not unreasonable. However, an offeror might argue that they will pay let's say 20 times last year's earnings about 60p or around NAV 74p.

Given that the company has put itself up for sale, I am hoping for two or three interested parties to create a bidding war which will ultimately lead to the best price (closer to my figure), but as I've said they might not get any bids at all.

I shall hold all of my shares regardless of what happens since even at 48.5p the shares remain undervalued.

On other matters, I notice that some of the pundits are predicting a market correction. I say, who cares, unless you trade the indices? As a long term investor and stock picker I'm only ever concerned whether or not the stocks I hold are undervalued or overvalued, if it's the former then I continue to hold and acquire and if it's the latter then I sell.

However, to add my own two-penneth, I would say this. Certain stocks have clearly run ahead of themselves, and judging by the general euphoria and self-congratulation on the bulletin boards, I anticipate one or two are in for a nasty surprise. It appears that certain companies have had a rapid run up in their share price linked to recovery prospects and improving economic conditions. However, all indications are that economic recovery both domestically and globally is going to be slow progress, and some results are likely to disappoint in the near term.

That said, the financial crisis and global recession of recent times was an extremely unusual event, the dot-com mania in reverse, if that makes sense. In my view there will be some market pull-backs (there always is), but for what it's worth given that global growth has hardly got back into first gear, I suspect that the current bull market will last far longer than even some of the most optimistic analysts predict.