What if? A two-word question often asked by investors, and I have been asking it to myself often in the past two weeks.
The first "what if" has to be the question of whether market participants are finally willing to lighten up on equities given cycle-high valuations and rising bond yields. After Wednesday's quick turnaround -- as the worse-than-expected CPI data were masticated and digested quickly by the bulls -- it would seem that the "what if we are heading for a bear market" question is off the table yet again. Fair enough. Corrections are healthy for the market and the chances of a real, good-old fashioned crash were always pretty low, anyway.
"What if" is much more interesting -- and potentially lucrative -- on the micro level than the macro level.
If the market is not crashing and rampant bullishness is once again the main theme for the FANG names, it leaves the intrepid investor to find individual names that have been overlooked by the market herd. The ones that have been punished could produce nice bounce-back rallies -- I'm talking 25% or more here, not a garden variety Nasdaq bounce -- but in order to do so, the market needs to have its questions answered.
So, here is a list of a few individual names that will outperform if their idiosyncratic "what if" scenarios are resolved favorably:
What if General Electric (GE) ever got its act together? A bounce back to $18, a level that GE shares did not see for nearly six years until last fall's plummet, would be a 20% move and a return to the $20s would easily exceed my 25% hurdle.
Well, the more pertinent question would be: what if GE would replace departing senior executives with candidates from outside the company? They didn't last fall, instead promoting new CEO John Flannery and CFO Jamie Miller from within. It would seem that GE's Board just doesn't understand Einstein's oft-quoted definition of insanity.
Until GE starts replacing insiders with outsiders I don't see any reason to expect better results from the conglomerate, regardless of how many break-ups, spinoffs and other acts of financial artistry are executed.
I'm not buying GE here.
Everybody loves to hate Frontier Communications (FTR) , and my recommendation on Real Money of its preferred shares -- (FTRPR) -- has netted me scorn. But the biggest possible "what if" was delivered (leaked by investment bankers, obviously) by Bloomberg in this article.
What if Frontier sold off the businesses in California, Texas and Florida (CTF) that it disastrously acquired from Verizon (VZ) in 2015 for $10.5 billion? The market for fiber assets has been red hot of late, and declining subscribers or no, those CTF assets are virtually all fiber. Thus they would be valuable -- most likely in pieces -- to an entity that wants to control the pipe for the ever-increasing amount of data consumed in America.
With the proceeds from an asset sale -- along with the balance sheet flexibility Frontier's lenders delivered in an amendment to its loan facility in late January -- Frontier could finally address the looming debt maturity "towers" that the market seems to believe will drive the company into bankruptcy. If FTR management can somehow undo one of the worst M&A transactions in the past five years, FTR (and FTRPR) shares will skyrocket.
That's a "what if" that I am playing.
What if the acquisition of Genworth Financial (GNW) by China's Oceanwide Holdings were approved? It's easy money, right? Oceanwide agreed in October 2016 to pay $5.43 per GNW share and GNW shares closed Wednesday at $2.87. Well, all that transaction needs is approval by the Council on Foreign Investments in the United States.
In the current political climate the market is betting CFIUS will never agree to this deal. Genworth and Oceanwide have filed four times with CFIUS (the most recent refiling occurred two weeks ago) and when CFIUS denied the proposed purchase of MoneyGram (MGI) by Ant Financial in early January GNW shares plummeted in sympathy.
Oceanwide has expressed interest in participating in Genworth's proposed $450 million term loan, essentially keeping the company afloat ahead of 2018 debt maturities. These two companies are trying their darndest to make this deal work, and if it does, Genworth shares should nearly double.
There's a lot of "if" in the GNW "what if," but I'm in, with a small position for now.