Are stocks too high? That question certainly resonated through the Berkshire annual meeting this weekend and this morning when CNBC's Becky Quick interviewed the Oracle of Omaha, Warren Buffett.
Warren gave you one way to look at stocks, the traditional measure versus bonds, and he found bonds wanting given their paltry yields.
Another way, though, is to look at what happens when a company buys another company, specifically whether the acquirer's stock goes higher. If it does, that's a classic sign that even though the market may value a company's stock at what looks to be a high price, the stock may be cheap to a company that wants the whole thing.
Today we got not one but two examples that verify stocks may be cheaper than we think: Sinclair Broadcasting Group's (SBGI) $3.9 billion purchase of Tribune Media (TRCO) and Coach's (COH) $2.4 billion buy of Kate Spade (KATE) .
Both of these deals were rumored and their actual premiums weren't anything special, 6.4% and 8%, respectively. But Tribune's stock had run from $29 to $39 ahead of the purchase and Kate's stock had moved up more than 20% before this morning's acquisition was announced.
More important from the point of view of valuation of the overall market, Sinclair's stock jumped 3% and the stock of Coach jumped 5.6%.
Why did they go up so much? First, Sinclair, a big television owner, took advantage of a late April Federal Communications Commission relaxation of the concentration rules, The change allowed a great deal more consolidation than would have been possible under the Obama administration. This is a classic example of how important agency deregulation can be for valuations in the stock market. President Trump's people simply don't fear increases in fees for consumers or the power of concentration to influence political views. Tribune Media gives them tremendous reach and much greater scale.
But I think the better buy is Nexstar (NXST) , a known local television station consolidator with a stock that, at $62, is well off its $73.90 high and is down 1.26% for the year. I've interviewed Nexstar CEOs Perry Sook, and he had felt constrained by the old rules.
I believe that if his company were to make an acquisition to take advantage of the relaxation, Nexstar's stock could roar. Why buy the potential acquirer? I think the targets could be overvalued because of takeover chatter, but Nexstar's stock is cheap no matter what happens.
I think Coach played this Kate deal perfectly as the stock had run all the way up to $24 and it finally sold at $18.50. Coach, under CEO Victor Luis, has become a house of brands, having previously bought Stuart Weitzman footware two years ago from the now-private Jones Group for $574 million. Coach has a gigantic worldwide network of stores, and running these additional brands through that network, especially in Asia, has created a terrific diversification away from U.S. bricks-and-mortar chains. In addition, Luis will seek to re-rate Kate as a more upscale brand, reducing wholesale and online flash channels.
To me, this is a wake-up call for both PVH (PVH) and VF Corp. (VFC) that their stocks could jump if they, too, went on deal sprees. Both had been acquisitive but both have been holding off doing deals, PVH in order to pay down debt from the Warnaco deal that gave them the rest of Calvin Klein that they didn't own, and VF Corp. for reasons not yet clear. PVH's stock has rallied 13% this year off a better-than-expected quarter and I think warrants a higher valuation. VF Corp.'s stock has stalled as its last few quarters have been weak.
Sinclair and Coach, two companies on the move by taking advantage of what to us may look like full valuations. Who's next to take the plunge?