As intuitive and obvious as his tongue-in-cheek advice may be, it's much harder to implement in a market that struggles with the current batch of worries -- recession, inflation, deficits and presidential elections. While equity investors fret and scramble, thousands of corporate leaders continue to run their companies day in and day out with the goal of maximizing profits and shareholder value. To me this is one of most comforting concepts of equity investing -- many smart people are working hard to help me increase my wealth.
In an environment where the US economy looks a bit shaky and the US dollar is so weak, one would think that many companies, especially those whose base currency is not the US dollar, would be looking to make strategic acquisitions. Granted, credit is tighter than before, but where combinations make good business sense, one would think the credit would be there to complete the deal.
2006 was a record year for M&A deals with something like $4 trillion worth transacted. 2007 was less robust as the credit crunch hit mid-year and slowed down the activity of deal makers, especially private equity investors. When the US dollar and US stocks are weak at the same time, one would think that foreign companies could become very active in scooping up cheap US assets.
I have seen many times over the course of my career the market's knee-jerk reaction to the announcement of a takeover -- every other stock in the industry goes up in sympathy. Would it not be better to own these stocks before a deal is announced?
Although we cannot know what stocks will be taken over, we can try to assess which stocks are cheap and which stocks might be an attractive strategic fit for a buyer.
I just happen to have a number of these kinds of stocks in my portfolio.
New York Times (NYT). In today's Wall Street Journal we read that two hedge funds have increased their stake in the company to 10% and are trying to elect their candidates to the board of directors. Even though the company is controlled by the Sulzberger family and is deemed "takeover proof" by many, the stock looks cheap enough to attract this kind of attention. Dow Jones was also considered takeover proof just before it was acquired by Newscorp. A return to a 3-year average P/E could take NYT back to the mid $20s and I have seen some thoughtful analysis showing how the stock could be worth as much as $87 per share out a few years, if the company could figure out a way to become more profitable as an Internet content provider. The dividend pays you 5.4% while you wait.
Ah, the market's open, I gotta run, but I will post the rest of my takeover ideas in the premium section later. See ya!
By Mike Goodson: See his profile at Vestopia