The Lesson of Today's Session

 | Jun 09, 2014 | 3:03 PM EDT
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Maybe we are all too complacent. Maybe the bears are too complacent that things must fall apart. Maybe the bulls are too complacent and not paying enough for stocks. That's how you have to feel about this session in which the averages are flatlining but underneath there is astonishment about the prices companies are paying for each other.

Let's start with what Tyson Foods (TSN) is paying for Hillshire Brands (HSH), which is a ho-hum provider of fattening meats and even more fattening pies. Here's a company that was desperate to get some growth. It was so desperate that it launched a takeover bid for another little growth company, Pinnacle Foods (PF). The combination intrigued: Hillshire's Ballpark Franks meet Pinnacle's Birds Eye. Jimmy Dean, I would like you to get to know Wishbone salad dressings. Sara Lee, your cakes have met your mate in Duncan Hines.

But Tyson foods wouldn't have it. Neither would Pilgrim's Pride (PPC). They moved with alacrity to block this merger. They wanted Hillshire Brands, apparently before Hillshire had launched its bid for Pinnacle. These two, Tyson and Pilgrim's, are the titans of the fresh protein aisles. They needed to move into the processed protein business. Along comes a company that is not for sale -- it's a company that is acquiring another company -- and neither Tyson nor Pilgrim cares. They insisted on owning something that the public markets simply didn't get or care for.

But the private market? The companies that really know their businesses? We know now that they thought that Hillshire was worth much more than the public markets either knew or would pay for. After a brief bidding war, today we learned that Tyson is paying $63 a share for a company with tired old brands that had little to no growth and are of questionable value in a world where natural and organic products are the way of the future.

How absurd is this? Not long ago, I was recommending Hillshire as part of a breakup play because my research for my book, Get Rich Carefully, showed that when companies split up into pieces, as Hillshire did as part of a Sara Lee restructuring, they command a higher value. I had thought that Hillshire at $30 could be worth $40. I thought I was stretching it, but I figured if you owned this pastiche of brands fast enough, it would get there eventually.

I definitely didn't think it would get there in a few weeks. Nor did I think it was worth anywhere near what these two companies were willing to pay. But who am I to question? I don't raise chickens. I don't purvey beef. In short, the management at Tyson and Pilgrim's are much smarter than I am about their businesses. Yet among those who followed it, I think I was probably the most aggressive in valuing Hillshire.

Now get this. On Friday, we did a breakup analysis of Kraft Foods (KRFT) because it has Oscar Mayer -- the best processed meat company in the world, or at least the best known. After careful thought -- and using the same kinds of pricing that Tyson and Pilgrim's were using before the end of the auction -- we came up with $21 billion for this one division of a $35 billion valuation. I did a lot of soul searching on Friday about whether I was being too promotional or too outrageous.

I now realize I was being too conservative. My valuation is off by a couple of billion dollars. It's crazy and absurd but, again, I can't use my valuations. I have to use the valuations of the players in the industry. So I was, alas, too conservative. I guess you could say too bearish.

You know I like biotech companies. I have championed Biogen Idec (BIIB), Regeneron Pharmaceuticals (REGN), Gilead (GILD) and Celgene (CELG) for ages, and even mentioned them most positively in Get Rich Carefully. That said, though, I recognize that the biotech sector has gotten too heated at times. I have seen so many biotech companies be slashed by the bears. I have seen stampedes away from them. In the end I circled the wagons around a few of them, namely the big four, as well as Isis Pharmaceuticals ISIS and Seattle Genetics (SEGN), which I think have superb pipelines. But the little guys? I walked away from them because I recognized that I had made a ton of money for people and I didn't want to be greedy.

A typical example of a stock I would not recommend was a little $7-per-share number named Idenix Pharmaceuticals (IDIX). It has a couple of drug formulations, including a hepatitis C formulation that recently had promising phase 2 results. But I only knew Indenix as an also-ran and a troubled company because back in 2012 one of its hepatitis C drugs caused heart problems and had its drug put on hold by the FDA.

Anyway, it all seemed for naught. First, Gilead, through its acquisition of Pharmasset, seemed to have developed a magic bullet for the dreaded disease, and its formulation has been selling well despite its $80,000 price tag. How can it not, it is a true life save.

Second, the area is a risky one. Bristol-Myers Squibb (BMY) spent $2.5 billion on a company called Inhibitex, which also had a promising hepatitis C drug that had to be written off because of drug test fatalities I couldn't figure out any company that would still want to make an acquisition in this space

Turns out that that not only did Merck (MRK) want it but, according to my "Squawk on the Street" partner David Faber, so did Johnson & Johnson (JNJ) and AbbVie (ABBV).

This drug is only in phase 2 testing and given the success Gilead is already having in this area, it's unlikely that the FDA would fast-track a competitive drug. I would never have recommended this stock to you, as either a takeover or a fundamental play. Frankly, it seems insane. However, I now feel I have to be more aggressive than I would like with this group. Therefore, I am going to redouble my efforts to find more candidates with good pipelines that can be bought or bought by others, starting with Seattle Genetics and Isis -- both which might be worth a heck of a lot more than I thought.

How about Analog Devices (ADI) buying Hittite Microwave (HITT), a maker of mundane wireless parts for $2 billion? This deal instantly sent both stocks higher. Hittite is a totally under the radar ho-hummer of a company, but its shares have soared $17 to the $77 and change range. But to me, the salient factor is the 5% gain in Analog's stock. Does that mean we need to rethink the worth of TriQuint Semiconductor (TQNT)? How about Cypress Semiconductor (CY)? Isn't the market way too negative about that one now? I bet it is.

Finally, there's Family Dollar (FDO). This is the least well run of the three major dollar-store plays, which also includes Dollar General (DG) and Dollar Tree (DLTR). Carl Icahn takes a big stake and next thing you know, not only does FDO go up 13% but Dollar General rallies 9% on the hope that it will combine with FDO. Who knows?

Wal-Mart (WMT) wants to be in smaller configurations. Maybe it will buy both companies? Before this morning, I would never have said that. Now I simply wonder if I am just too bearish and uncreative, as I described the short-sellers the other day. It is time to shake my positive complacency and get more serious about being aggressive about the real valuations of companies. Isn't that, after all, the real lesson of today's session?

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