Where the Bargains Are

 | Feb 18, 2014 | 10:15 AM EST
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Nothing like buying a company in your industry that allows you to take out a competitor and immediately raise numbers.

Every time this happens -- literally, every time -- a big bump comes from the acquirer, not just the target, and the bump is only day-one of what can turn into a multi-quarter move. That's why I think you can actually buy Actavis (ACT) at some point today because of its purchase of Forest Labs (FRX). It's also why I keep saying that the market is undervaluing so many companies -- you just don't see it until other companies take advantage of them.

I come from an era where the acquiring stock almost always goes down or sits there forever as people try to figure out why the deal makes sense. I come from an era that says that when a company buys another company, it is usually out of desperation.

That's why the acquirer has historically gone down. But this deal -- like so many that have occurred in the airline, rental car, media and telecommunications/cable sectors -- is immediately wildly accretive and makes so much sense that you can only ask what took so long.

Sure, Comcast (CMCSA) didn't' go up last week with its acquisition of Time Warner Cable (TWC), but the stock had been on a tear and Comcast is issuing a huge amount of stock to get it done. I think the combined company is a huge buy, however.

It's one of the reasons why I was hoping that Men's Wearhouse (MW) and Jos. A Banks (JOSB) could get together to take out capacity and perhaps get some price relief. I didn't' think that buying Eddie Bauer would be the way to accomplish that mission for Banks.

It's also why I think the retail industry in general isn't a great place to be. They are way overstored, just far too many of them, and their reluctance to get together has hurt them mightily. That and the ability of J.C. Penney (JCP) or Sears (SHLD) to hang on makes the overall ownership case very difficult.

When they do consolidate, it is amazing. For years, there were dozens of drugstore chains duking it out, including many private and smaller chains. Now there are only three and the performance of all of them has been nothing short of fantastic. Walgreen (WAG) wasn't hurt and is now being helped by a giant acquisition. CVS Caremark (CVS) cut a big chunk of earnings out of its plans because of tobacco, and it's up five points. Rite Aid (RAD) is taking out $6 with a new distribution agreement with McKesson (MCK).

Consolidation tells you there are bargains. Companies that don't want to do deals simply aren't being creative enough. They should all be sentenced to reading my chapter on consolidation in Get Rich Carefully ten times over. Maybe then, they would get it!

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