Don't Dismiss the 'Needles in the Haystack'

 | Jul 23, 2012 | 3:33 PM EDT
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Chinese oil colossus CNOOC (CEO) bought Nexen, the huge Canadian oil concern for $15 billion? Genesee & Wyoming (GWR), a short-line railroad, picked up Rail America for $1.39 billion? Closely held Joh H. Benckiser shelled out $1billion for Peet's Coffee  & Tea (PEET)? NRG Energy (NRG) purchased GenOn Energy (GEN) for $1.7 billion to create the largest power merchant? DigitalGlobe (DGI) snared competitor GeoEye (GEOY) for $900 million?

I know, needles in a haystack, right? They are just drops in the bucket and irrelevant vs. Spain -- a waste of time.

Unless, of course, you own one of them. Unless you actually made money, and then you are thinking, to heck with Spain, as you have been able to say so many times to companies that have broken themselves up or agreed to be purchased by corporations eager to extend their reach and buy cheap targets using inexpensive money.

You may want to dismiss all of these. Nevertheless, let's break them down. The Chinese need natural resources, so they go for a huge Canadian company that has terrific global natural gas and oil assets. There are so many other companies that fit that description and CNOOC has so much money that you have to wonder whether this purchase is one-off, or part of a trend. We know the Koreans, the Japanese, the Norwegians and the Indians have all been acquisitive. Heaven knows, the targets have come down low enough and these acquirers are simply trying to get the resources they need and are using the stock market's gloom to make their moves.

Peet's was an expensive purchase. Selling at 35x earnings going into the session, it became even more expensive after the bid. But the acquirer is smart. It knows that these properties are few and far between and hard to create.

Geoeye has been battling with Digital Globe for ages. So why not combine forces? Everyone benefits.

NRG has been a terrible laggard because it has little growth. Suddenly it's got real growth for $1.7 billion, which moved its shares up sharply.

Genesee and Wyoming has lacked growth for ages. Now that it is combining with RailAmerica, it has gone from an irrelevant minor to a mini-major rail in an environment where everyone seems to like the rails.

What's the takeaway? Simple, we may not like stocks. We may think the asset class is tainted. We may marvel at anyone who is foolish enough to buy stocks.

But how about companies? When whole companies are involved it's a very different story. The gloom that is associated with the stock market does not pervade the companies that want their stocks to go higher by growing through acquisitions.

Our hatred of stocks equals their opportunity. So are these really needles in a haystack? I think they are companies that are worth a great deal to other companies --  even if they are not worth much to us. The problem with our thinking, though, is that we genuinely believe anything good is like a needle in a haystack. But if you put your hand in the haystack today, you got it ripped to shreds by all these needles.

That's something to think about as you debate leaving stocks all together. 

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