How expensive is this market? Here we are at all-time highs and that question must be asked because you don't want to be the last person at the party -- and you certainly don't want to fool yourself into thinking that there's plenty of room to rally when things are about to rollover.
It's easy to conclude that we're past the sell-by date when you look at a stock like Alphabet (GOOGL) . As I listened to the call, I was surprised to hear how complacent they seemed, as if a tough comparison excuses weaker growth when we all knew what the comparison would be against, or that they will have no problem catching up to Microsoft (MSFT) and Amazon (AMZN) in the cloud because because of a personnel change. Don't get me wrong, I love the company and it's actually not an expensive stock. But one thing never changes: When you miss big, your stock's overvalued no matter what the price-to-earnings multiple may be.
But then we look around and we see other signs that tell us not only is this market not expensive, but there are whole sections that might be ridiculously cheap, they just aren't obvious until they hit you in the face.
Right now we have two potential acquisitions going on that are indicative of precisely what I am talking about: Ingersoll-Rand's (IR) potential acquisition of Gardner Denver (GDI) , a company that makes compressors, flow controls and valves among other bent-metal items and Occidental Petroleum's (OXY) likely purchase of Anadarko Petroleum (APC) for $38 billion.
Now I know it would be tempting to say that the more than 15% rise in Gardner Denver's stock yesterday is fabulous evidence that its stock was undervalued. Wrong read. The undervaluation comes from the side of the buyer: The stock of Ingersoll-Rand jumped seven bucks, or 6%, on the news that it was buying Gardner Denver.
That's outstanding because, before this weekend, Gardner Denver was a bit of an orphan. Its story was pretty emblematic of an era where pure industrial stocks just didn't get much of a valuation. I remember back in 1994, a diversified conglomerate called Cooper Industries decided to spin off Gardner Denver because management thought that the company was too cyclical and too linked to oil and gas.
For 19 years, the company then traded independently, making small acquisitions and bulking up for, well, who knows what. Again, in 2013, it seemed like the company couldn't get a multiple worth staying public for, and KKR bought it for $3.9 billion after what was a long-drawn out auction that did get shareholders a 39% premium to where it traded before the auction began.
Then four years later, they brought it public for $4 billion in a dud of an offer, priced at $20, when it had been expected to sell for between $23 and $26.
In other words, we're talking about a company that's struggled to find a home. Out of nowhere, though, Ingersoll-Rand decide to make a bid for this orphan and its stock rallies gigantically on the news. When a company like Ingersoll-Rand makes a bid and its stock goes higher, especially after it was already up about 25% for the year, that says investors believe that not only was GDI undervalued but Ingersoll was, too.
As dispositive as this merger might be for determining undervaluation, few deals shine a spotlight on the concept of inexpensive as much as the bidding war between Chevron (CVX) and Occidental for Anadarko -- and don't I know it. I have long admired Anadarko and believed it to be so undervalued that I bought the stock for my charitable trust all the way down to $40. The decline was sickening and it occurred because the company delivered a suboptimal quarter with a disappointing mix of oil and gas.
The company wanted you to believe it to be a temporary aberration, but the market was having none of that. You know who believed though? Mike Wirth from Chevron and Vicki Hollub from Occidental, two of the smartest oil and gas people around. Few know the Permian better than Hollub. There aren't many major growth oils -- Wirth's Chevron's one of them. I find it nothing short of shocking that this stock could almost double from that low not that long ago because two of the best oils are tussling over it.
You may say these are both one-off. I say sure, but if they happen almost every day, as is often the case, can't you see a more bountiful pattern emerging?
