I Told You Buyouts Were Coming. Here's One Now -- and My Key Takeaways

When stock prices get really cheap, buyout offers start to emerge. Monday morning saw the announcement of Toronto-Dominion Bank deal for First Horizon Corporation at $25 per share in cash. There is a lot to learn from this transaction. TD says the deal will be immediately accretive to its earnings. By definition, that means the company is getting a good deal, even while paying a hefty 37% premium to FHN's previous day's quote of $18.25. Brave investors who knew that FHN was a fine company could have picked up its shares as low at $6.30 during the Covid-panic low. FNH's long-term growth had been well established from 2011 through 2019. Better still, shareholder returns through Aug. 31, 2020 represented just a fraction of the value which had been created over those eight years. That is the essence of what I speak about frequently when I suggest major catch-up moves higher are in the offing. FNH's insiders did not miss their chance to buy shares on the cheap during March and April of 2020. Directors plowed over $1.5 million of their own money into 168,000 shares at an average cost of $9.20. Here's another key take-away from that. Not one of those directors were able to call a bottom in FHN. They simply bought when they felt the company's real worth was much higher than what they were paying. Each was willing to pay well above FHN's absolute nadir at $6.30 per share. I first wrote up the stock on Aug. 31, 2020 when FHN was hovering about $9.62. It looked cheap back then, even as analysts remained bearish on the pace of its recovery. Value Line only projected 2020 earnings per share of $0.80 and 2021 earnings of $1.30. As things played out, 2020 came in much higher, at $1.22, and EPS rose again to $2.07 last year. Using then-in-effect lower estimates, I still came up with a $16.90 end of 2021 target price for FHN. That suggested almost 82% in total return was likely by Dec. 31, 2021. I wasn't off by much. FHN closed out 2021 at $16.37. Other research houses saw FHN as attractive in August of 2020. They were not as bullish as they should have been, though. Here is data from Yahoo Finance, Morningstar and Value Line from that moment in time. With this week's buyout, FHN has now reached Value Line's high-end projected price target for 2025, three years early. Short-term market movements are nearly impossible to predict. Longer-term ones are not. That is why there have been lots of legendary investors ,but only a handful of mostly infamous traders. Jesse Livermore, author of Reminiscences of a Stock Operator, was the most well-known of that group. He went bankrupt on multiple occasions and finally killed himself. What is the lesson? Be an investor, not a trader. There is one more key concept to discuss here regarding FHN. My summer of 2020 article detailed the conservative Feb. 19, 2021, $10 strike price buy/write combination play as shown below. The numbers represented 1,000-share, 10-call and 10-put quantities. Here are the actual best and worst-case scenarios show for that combo trade back on Aug. 31, 2020. If FHN merely rose by at least 4.5% from the trade inception price and held $10 on expiration day the best-case scenario would unfold. The raw total return figured to be over 50% in less than six months, or 106.8% annualized. That is exactly what happened as documented below. Better still, the buy/write structure provided 13.5% of downside protection just in case things didn't go as well as expected. Here are the major concepts that this TD-FHN deal validates. Market action can be very random over short periods, especially during period of duress, such as the Covid-crisis of 2020 and today's geopolitical turmoil. In the end, almost all stocks regress to their true values. Patience, in the form of 12 to 24 month time horizons, may be necessary to achieve regression to the mean price movements. Many times, though, that occurs much faster. Buy/write combinations are an ideal way to play stocks you like if you feel comfortable with options. Insider buying is often a very good indicator that stocks are clearly too cheap. Even insiders can't be perfect in calling bottoms. Don't beat yourself up if you are a little early and see your purchase go down even more. It's OK to average down. Don't listen to naysayers who say that is just throwing good money after bad. It's also OK to average up if your analysis says the stock in question is still undervalued. Investing beats trading.

I Told You Buyouts Were Coming. Here's One Now -- and My Key Takeaways

Let's look at the proposed deal between First Horizon Corp. and Toronto-Dominion Bank -- and what we can learn from the planned buyout.

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