Buyouts Are Booming, Here's Who Might Be Next

Auto parts supplier Tenneco on Wednesday accepted a buyout offer at $20 per share. One day earlier, TEN was available to investors at under $10. How can Apollo Management afford to pay more than double Tenneco's recent market price? The stock has proven earnings power of $3 to $6 per share. I recommended TEN here last March at $11.30. By mid-June of 2021 it changed hands above $22.50. Afterward, though, it sickeningly declined, bottoming out near $9.50 again as recently as Feb. 11 of this year. Buyouts happen when management or outside parties think they'll be getting a bargain, even while paying above-market prices to get the deals done. It all comes down to understanding owner earnings, the true meaning of price-to-earnings ratios and the term, earnings yield. The graphic below details how I see P/E: Buying entire companies at single-digit multiples implies getting over 10%, and sometimes much higher after-tax returns on investment, even if profits do not grow at all. Earnings yields are the inverse of P/Es. The topic is discussed below, explaining how low multiples translate into huge returns on investment, while high P/Es offer unappealing rates of return. Regular readers of my columns know I made huge profits last year on arts and crafts retailer Michael's (previously MIK) before it was taken private last March at $22. MIK hit a ridiculous Covid-panic low of $1, even though it consistently earned from $1.72 to $2.35 per share in the five pre-Covid years. It was still available at $8.65 on Oct. 20, 2020 with fiscal 2021 expected to show $2.05 in EPS. As things turned out. That estimate was way too low. MIK made over $3 /share in the fiscal year ended January 2021 just as the buyout offer was closing. The buyers took it off the market at $22, even as a simple 12 multiple would have justified well over $36. Here are three of my very favorite stocks which could easily attract a takeout offer, based on their absurdly low current valuations. The Children's Place just finished an all-time record year. EPS will come in miles ahead of all previous years. Yahoo Finance thinks fiscal 2021's final tally will be over $13 per share on a stock which topped out at $161.60 back in 2018 on trailing EPS of $7.91. The shares troughed at under ten bucks in summer of 2020 due to Covid-related, government-imposed store closures. It bounced back to over $113 on Nov. 18, 2021 as quarterly profits keep beating analyst estimates by wide margins. Amazingly, as of Feb. 23, 2022 the shares were back under $60 for the first time since Jan. 18, 2021. There has been nothing but great news. Unless you know something that is not public, the sub-$59 price appears to be a gift for traders looking for either short or long-term gains in the months/years ahead. PLCE's average P/E has run about 16.7-times. Its Feb. 23, 2022 multiple was just 4.5-times. Even a partial rebound to a more historical valuation could easily justify a price of $130 - $200 quite quickly. Buying the whole company at under five-times earnings is the equivalent of making greater than 20% after-tax on the entire company at today's quote. Kitchen cabinet and bathroom vanity maker American Woodmark was hurt by soaring lumber prices during 2021. Paid-up future backlogs had to be delivered at the old price points until sticker price increases could make their way to the bottom line. As such, fiscal 2021's EPS will be significantly below the previous year's number. Management told us months ago that fiscal Q3 numbers (to be reported Thursday pre-market) will get a partial boost from those higher prices but still lag year over year. That probably accounts for its huge selloff from last winter's peak of $108.80 to its sub-$50 price right now. Starting with the very next quarter, though, at least $50 in additional revenues will show up simply on the higher pricing. Fiscal 2021 ends on Apr. 30, 2022. Every quarter from then on should show large positive comparisons against FY 2021's relatively low profits. That 180-degree turn from negative to very nice year-over-year comparisons is likely to attract lots of buying. AMWD now sells for its lowest point since May of 2020, coming on the heels of the Covid-crisis. There is every reason to think the shares can recapture $114 to $160 with all-time record EPS on tap for fiscal 2022 and beyond. A deep-pocketed, forward thinking private equity firm might just want to make an offer ahead of that good news. My final example of a stock there for the taking is Caleres . The firm just finished its best year in history (FY 2021 ended Jan. 289, 2022). EPS should exceed $4. The stock bottomed at $3.12 while its stores were closed by government edict. They hit $29.36 last June and were almost $29 again as recently as Nov. 18, 2021. At its Feb. 23, 2022 quote of $20.59 CAL was offered for just 5.1-times trailing earnings. The stock's historically average P/E is about 13.9-times. Simply returning to that valuation could send CAL to $50 or $60 in short order. Note on the chart above that Caleres fetched from $32.30 to $41.10 during each of the six years stretching from 2014 through 2019 when EPS never exceeded $2.21, let alone $4.00. If ever there would be a going private bid, this appears to be the perfect moment for it to appear. Deals typically happen at premiums to market prices but less than the target companies' true fair values. The three stocks mentioned could see nice offers versus current prices while still leaving plenty on the table for the acquiring parties. Don't miss your chance to own any or all of these at their now incredible bargain prices.

Buyouts Are Booming, Here's Who Might Be Next

Here are three stocks that could potentially see nice offers vs. current prices if acquired.

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