If You Feel Like You Missed This Rally, There’s Good News…
Horse racing season is underway. The Belmont Stakes (the first leg of this year’s Triple Crown) is set for June 20. But I’m not as excited about the ponies as I am about the fast-and-furious race that’s taking place in the market right now.
Stocks have been sprinting like a determined thoroughbred rounding the ¾ pole and heading for the wire.
You’d think they would have lost some steam by now. The Dow has risen nearly 7,000 points from its March low. That’s a heated advance of about 37% in just two months. The S&P 500 recovery has been strong as well.
If traders were showing any trepidation, reassuring comments from Fed Chief Jay Powell helped assuage fears and put the bulls back in charge. While acknowledging the devastating impact of Covid-19 on the U.S. economy, Powell spoke confidently of a second-half recovery and pledged that the Central Bank would utilize a “full range” of monetary tools to combat this crisis.
Take cell tower owner Crown Castle (NYSE: CCI), a former holding of mine. Between February 20 and March 20, the stock lost a quarter of its value, plummeting from above $160 to below $120. Yet, there was a negligible fundamental change in the business itself. In fact, the company never altered its 2020 earnings outlook.
The market is often quick to reconcile these pricing discrepancies. In this case, the rebound was just as fast as the decline. By April 20, CCI was back in the $160 range again – a full round-trip.
Still, not every quality oversold stock has fully recovered.
Meanwhile, as consumers start to emerge from hibernation, investors have been returning to hard-hit cyclical stocks. On May 18 alone, Delta Air Lines (NYSE: DAL), Carnival Cruise Lines (NYSE: CCL) and Six Flags (NYSE: SIX) rallied 14%, 15%, and 19%, respectively.
Yet, these same stocks are all still trading at less than half of where they were just a few months ago.
Value Still Remains
If you feel like you missed out on this rally, don’t worry too much. There are still attractive discounts as far as the eye can see.
That’s good news for us over at my newly-launched service, Takeover Trader. Because if you’re a CEO or private equity manager with vaults of idle cash waiting on the sidelines, this is an opportune time to pounce.
It’s been relatively quiet on the M&A front so far, which is understandable in this uncertain environment. Businesses are more interested in their survival right now than going on the offensive. Even those with their financial houses in order are still cautiously seeing what unfolds over the next few weeks.
But this is just the calm before the storm. Cash is plentiful, debt cheap, and valuations affordable. As many industries begin returning to normal (or at least taking baby steps), private equity groups and other buyers will start to pounce. But don’t just take my word for it.
A recent Pitchbook survey of the nation’s top executives found that 56% of decision makers are “actively planning” to pursue an acquisition within the next 12 months.
It makes sense. Buyers are always more motivated to go shopping when there are deals to be had. That’s true regardless of whether you are buying a few shares or an entire business. Keep in mind, the primary responsibility of any CEO is to deploy money wisely. You don’t spend hundreds of millions (or billions) of shareholder capital without answering some tough questions.
Among them, what are the projected cost savings and revenue synergies from the merger? A takeover only makes financial sense if those benefits outweigh the premium and the purchase is eventually accretive to the bottom line. Deals that might have been economically inadvisable at $50 per share could be far more inviting at $30 or $40.
All of which is to say, buckle up.
When the top brass at StreetAuthority approached me earlier this year about launching a new advisory service centered around acquisitions, I was stoked. That’s not a word I use, really. But in this case, it fits.
Of course, I never expected to launch this newsletter in the middle of a global pandemic with the world turned upside down. When we laid the initial groundwork, there was no talk of social distancing or shelter in place or bending the curve.
But that’s why investors must always be on their toes, ready to adapt to whatever the economy throws at us. Between you and me, I was relieved to see the overheated market let off some steam. The occasional pullback is healthy and keeps valuations in check. And indiscriminate panic selling (like we saw in March) goes even further… divorcing stock prices from the underlying value of many quality businesses.
Regardless of whether you’ve joined my new service or not, I hope you’ve been taking advantage of this recent rally. Opportunities to buy – like the one we saw amid the Covid-19 selloff – don’t come along very often.
If you’d like to get on the waitlist for my new Takeover Trader service, go here.
In the meantime, consider checking out the latest research from my colleague Dr. Stephen Leeb…
Gold could soon soar past its all-time high of $1,917 an ounce – which is great news if you currently own any physical gold… and even better news if you own gold stocks.
And Dr. Leeb has recently discovered a company that is sitting on what could be the largest gold deposit ever discovered – currently trading at around $9 a share – and could allow early investors to make 20-times their money… maybe more.