Nothing's harder than to recognize that the issue behind this bear phase in stocks isn't earnings; it's worries about credit -- specifically in the high-yield bond market.
Right now we are seeing a slaughter in the bond market for companies trying to do deals. If your company needs debt to grow, then your stock is being punished and there's not much that can be done except to watch the carnage, wait it out, or just take a loss.
Case in point? XPO Logistics (XPO), the logistics and trucking company whose CEO, Bradley Jacobs, came on Mad Money last Friday and talked about the notion of how his company's doing well but his stock is doing badly.
XPO is what's known as a roll-up company. It's a vehicle that's used by the CEO to buy other companies in order to get growth or dominate an industry. XPO Logistics recently announced the purchase of Con-way, the giant trucking company, for $2.72 billion. That deal's being done right on top of another large acquisition, the purchase of a European logistics company for $3.5 billion back in April.
Now, XPO has the borrowing capacity to make both acquisitions without much stress. It's getting money raised from a brokerage house for a very attractive price, low to mid- single digit interest rates, to do the Con-way deal. If you own XPO you'll be in all forms of transport and Con-way's a terrific company that's being bought at a price appreciably below where it was just a year ago.
However, the market's punishing companies that roll up targets, and XPO is caught up in that punishment as its stock is down 47% from its high back in May, including 8% just today after defending the acquisition in a pretty cogent way.
Jacobs, who is the company's largest shareholder, says this is the price that shareholders have to pay to grow and that this is pretty much a once in a lifetime opportunity to bulk up. But right now a deal that would have been applauded a year ago and driven the stock much higher is hated, because the times have changed, and the stock is being pulverized.
It's not just XPO. Take a look at Valeant (VRX), which is a drug company roll-up. It just came out today and said everything is very strong, so it's been able to rally. But no one knows how long that will last, and it's come down from $262 to $200 in a heartbeat.
Or how about Platform Specialty Products (PAH), a chemical company whose CEO, Daniel Leever, has been on Mad Money, that is specifically a vehicle created to buy chemical companies? It has been flying high when money was cheap. But now the roll-up is down 44%, including another 8% today.
Is this logical? I think if future growth is going to rely on acquisitions and those acquisitions need debt, you have to accept that the window for debt for these kinds of roll-up companies is closing. Consider that Olin (OLN), which is buying Action Alert PLUS portfolio holding Dow Chemical's (DOW) commodity chemical business, had to borrow at 9.75% last Friday to get the money to do so. That's just way too high a yield, and is unrealistic for most companies to pay without risking default. So in that sense, the decline in the equity of these acquirers does make sense.
Now, returning to XPO, if the company can take out costs and make the most of these two recent acquisitions, then it is going to be a fabulous buy and one day that stock will go higher. Right now, though, it is in the vortex of what's hated. The market wants as little risk as possible, and these kinds of debt-financed deals are viewed, rightly or wrongly, as totally toxic. One day they won't. But that day has not yet come.
