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Remember that Merger Rumor? Yeah, About That….
Posted by Eddy Elfenbein on January 11th, 2011 at 9:21 amBloomberg has an interesting article. It turns out that a fairly large percentage of mergers don’t work out:
The surest way to profit from takeover speculation in the stock market is to bet it’s wrong.
Electronic news services, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg. A total of 104, or 14.5 percent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 percent, betting on declines yielded average profits of 1.2 percent in the next month, an annualized gain of 14 percent.
Opportunities to employ the strategy are increasing as mergers recover from the worst recession in more than 70 years, data compiled by Bloomberg show. After bottoming in 2008, the number of unconfirmed stories about possible mergers surged 71 percent to 611 last year from 2009, data compiled by Bloomberg from more than 50 news providers and brokerages show.
“Sell into the strength,” said John Orrico, who focuses on mergers and acquisitions at New York-based Water Island Capital LLC, which oversees about $2.2 billion. “We see it as an opportunity to sell if we think the rumor is false or ridiculous, which in most cases they are.”
Short selling to speculate on declines on supposed takeover targets produced more than twice the average return generated by U.S. stocks, data compiled by Bloomberg show. At the same time, companies in the Russell 3000 Index had the same chance of being acquired in any 12-month period since 2005 as those that were the subject of merger stories, the data show.
So betting against the rumor is the sounder strategy. Or, at least, it has been for the past few years. That’s one of the red flags I have about this study — the time period is very short.
I’ve always been very skeptical of investing in a company because others think it might be bought out. The problem is that you’re adding other variables to the mix that you can’t control.
The better way to invest is to think that you’re making the buyout offer. Then, every once in a while, some large investor agrees and you get a nice premium. That’s happened to us twice on the Buy List in recent years. Biomet was bought by a private equity firm, and Golden West Financial was bought by Wachovia (which was later bought by Wells Fargo).
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Your Friendly Neighborhood Fed
Posted by Eddy Elfenbein on January 11th, 2011 at 9:21 amToday’s morning news update on my site includes a link to a good New York Times article on the bond desk at the Federal Reserve Bank of New York.
I mention this because a few weeks ago I thought that writing about the NYFRB’s Permanent Open Market Operations (or POMO) would make for a good article topic.
There seems to be a lot of confusion on this topic. I think POMO has a sinister reputation that it doesn’t deserve. My goal was to write a Planet Money-style article on POMO in an attempt to try to make something complicated easy to understand (the Planet Money team does great work).
I contacted the New York Fed and asked if I could speak with someone on the bond desk. Well! You would have thought I’d called up the Pentagon and asked, “Hi, may I please have some of your launch codes?”
Let’s just say that the press office was comically unhelpful and unprofessional. Well, not completely unhelpful. They did refer me to the FAQ section of their website. I pressed some more and they finally said I could talk to someone. Then they changed their minds and said I couldn’t.
So in my attempt to show that the NY Fed really isn’t some crazy secretive institution, I found that that they’re precisely that.
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Morning News: January 11, 2011
Posted by Eddy Elfenbein on January 11th, 2011 at 7:22 amEarnings Hopes Lift Stocks, Euro Steadies
Economists Foretell of U.S. Decline, China’s Ascension
Wow, Look What The Dhaka Stock Exchange Did One Day After Crashing And Causing Violent Riots
Strategists’ Forecasts for Standard & Poor’s 500 Index in 2011
Strategists’ Forecasts for Standard & Poor’s 500 Index in 2012
The Fed’s QE2 Traders, Buying Bonds by the Billions
Analyst Says It May Be Deal Time for JPMorgan
Ford Plans to Hire 7,000 Workers by 2012
Duke Energy to Buy Progress Energy for $13.7 Billion
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Birds Dying Because of DADT Repeal
Posted by Eddy Elfenbein on January 10th, 2011 at 10:12 pmFinally, someone’s gotten to the bottom of this:
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Slight Gain for the Buy List
Posted by Eddy Elfenbein on January 10th, 2011 at 4:44 pmToday was a decent day for the Buy List. While the overall market was down 0.20%, our Buy List gained 0.06%. Not big, but at least we’re going in the right direction.
The big winner today was Deluxe Corp. (DLX) which climbed 3.98%. Hopefully, Stryker (SYK) will give us another boost tomorrow.
For the year so far, the Buy List is up 1.68% to the S&P’s 0.96%.
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Nice Guidance from Stryker
Posted by Eddy Elfenbein on January 10th, 2011 at 4:16 pmGreat news from Stryker (SYK). The company announced Q4 sales ahead of its earnings report. Sales for the quarter came in at $1.995 billion which is up 8.8% from a year ago and in line with what Wall Street was expecting. For the year, sales were $7.32 billion, up 8.9% for the year.
Stryker also said to expect full-year earnings (after charges) for 2010 to range between $3.31 to $3.33 per share, which is slightly above their earlier guidance of $3.27 to $3.30 per share. That’s an increase of 12.2% to 12.9% over 2009’s EPS of $2.95.
Here’s what they had to say for 2011:
The financial forecast for 2011 includes a constant currency sales increase of 11-13% as a result of growth in shipments of Orthopaedic Implants and MedSurg Equipment as well as sales from the recently acquired Neurovascular business. If foreign currency exchange rates hold near current levels, the Company anticipates net sales will be favorably impacted by approximately 0% to 1.0% in the first quarter of 2011 and by approximately 0.5% to 1.5% for the full year of 2011. Excluding the expected impact from foreign currency as well as acquisitions (Sonopet Ultrasonic Aspirator, Gaymar Industries, Porex Surgical and the Neurovascular division of Boston Scientific), projected sales growth is 5-7%.
The Company projects that adjusted diluted net earnings per share for 2011 will be in the range of $3.65 to $3.73 (Note: Wall Street had been expecting $3.64 – Eddy), an increase of 10% to 13% over expected adjusted diluted net earnings per share of $3.31 to $3.33 in 2010. In 2011, the Company anticipates acquisition and integration-related charges associated with the recently completed acquisition of the Neurovascular business to reduce reported diluted net earnings per share by approximately $0.21 to $0.25, including transaction costs, additional costs associated with the step-up of inventory to fair value and other integration costs.
“We believe our results for 2010 and our financial forecast for 2011 underscore the strength of our unique sales footprint that is driving superior results in the near term while investing in critical growth areas for the long term,” commented Stephen P. MacMillan, Chairman, President and Chief Executive Officer.
The stock is up 2.4% after-hours. If you’re new to investing, I should point out how good it is to have a company give us guidance for the next 12 months. Not many companies do that. I don’t expect the forecast to be perfect, but I love the fact that we’re not kept in the dark.
Today’s closing price was $54.70. Let’s take the mid-point of their 2011 forecast which is $3.69. That comes to a forward P/E of 14.8 which is a good value, and there’s still plenty of room for upside surprises.
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Medtronic CEO: “Cautiously Optimistic”
Posted by Eddy Elfenbein on January 10th, 2011 at 4:00 pmWilliam Hawkins, the outgoing CEO of Medtronic (MDT) made some comments about the industry at today’s JPMorgan Healthcare Conference. (That’s an odd coming-together of two of our Buy List stocks.)
Hawkins, who was named CEO in Aug. 2007, said he’s satisfied with his performance despite a roughly 30% decline in the company’s share price during his tenure in what’s been “arguably the toughest three years in the history of medical devices.”
“I feel like I’ve gotten done what I wanted to get done,” Hawkins said, citing in particular an improved position for the company in emerging markets such as China, better margins and a management team put in place that’s “truly is one of the best management teams in all of health care.”
Hawkins added that he is “cautiously optimistic” about the state of the industry in 2011, saying that there is some evidence people are starting to visit their physician more frequently, following a slow-down during the economic recession.
“We’re seeing some stability,” Hawkins said. “People, they can’t wait forever to have their back repaired.”
“Cautiously optimistic” is one of those nonsense phrases that sound like you’re saying something but you’re really not. It can be used in any situation.
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Not All Banks Are Suffering
Posted by Eddy Elfenbein on January 10th, 2011 at 1:42 pmOne bank in particular just finished a banner year:
The Federal Reserve Board on Monday announced preliminary unaudited results indicating that the Reserve Banks provided for payments of approximately $78.4 billion of their estimated 2010 net income of $80.9 billion to the U.S. Treasury. This represents a $31.0 billion increase in payments to the U.S. Treasury over 2009 ($47.4 billion of $53.4 billion of net income). The increase was due primarily to increased interest income earned on securities holdings during 2010.
Under the Board’s policy, the residual earnings of each Federal Reserve Bank, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in, are distributed to the U.S. Treasury.
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A Look at the Defense Sector
Posted by Eddy Elfenbein on January 10th, 2011 at 11:59 amThe Spade Defense Index (^DXS) had a remarkable run for several years. The index outperformed the S&P 500 every year for nine-straight years from 2000 through 2008.
Lately, however, many defense and aerospace stocks have come under hard times. Just recently, a few defense names have come to life. Over the last three sessions, the DXS is up by 2.36% compared with just 0.10% for the S&P 500.
A couple of stocks like General Dynamics (GD), Lockheed Martin (LMT) and Raytheon (RTN) are beginning to look very attractive. Check out their P/E ratios.
From our Buy List, I like Moog (MOG-A). I’ve also written before that DigitalGlobe (DGI) and GeoEye (GEOY) both look very compelling.
Here’s a look at the stocks in the index along with their dividend yield and forward P/E ratios:
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His