What happens if the whole market may be UNDERVALUED?
I know that's preposterous. We have had a huge run. The Nasdaq is up gigantically. We just came through a sell-off where there were no buyers. None. Now suddenly, we got down to some level and there are buyers all over the place?
How is that possible?
Because of the mergers and acquisitions and investments and earnings. They are true judges of stocks in the vacuum of politics or the Fed or chatter about taxes and the race for the White House or even seasonality, which is supposed to be playing havoc with prices.
Let's start with Gilead's (GILD) startling buy of Immunomedics (IMMU) . Here's a company that traded at $2 four years ago, and $8 as recently as February. It's had three CEOs in one and a half years. But it does have a viable cancer franchise that some analysts think could be big in a couple of years. Here's what's amazing. It had rallied to $40 in August on rumors of a takeover. Then Gilead comes in and pays a 108% premium for the company. Yep, Gilead's paying $88 for the company, a $21 billion deal.
The amazing thing, though, is even at a 108% premium, even after a revolving CEO door, even after the darned thing traded at one-tenth of the bid as recently as April, the stock of the buyer, Gilead, is up. The market's judgment is that it's good for Gilead. Can't one conclude that the stock was radically undervalued before the bid even as it seems like it's impossible given how low it was earlier in the year? I have no other conclusion.
How about Nvidia (NVDA) buying Arm Holdings. Here's a stock and cash deal that will elevate Nvidia in semis because it will merge its graphics chips that are chiefly in games and data centers, with the computer processors from Arm, and be in almost every device imaginable, especially cellphones where Nvidia's not a presence. The company's paying $40 billion for what's a rather unknown company because it is buried within the bowels of Softbank, the Japanese giant.
So how much is Nvidia down given that it is giving away stock that's already up 100% for the year coming in to today?
Nope, it's up. At one point it was up more than any other stock in the S&P. The fact that there could be this asset for sale that would cement one company as the leader in all of semis is amazing to me, and amazing to the stock market. I know many analysts immediately said there would be too much opposition to the deal, from clients and governments. But Jensen was adamant that the deal would pass muster. Hey, few thought he could get the Mellanox deal, another key semiconductor company through China earlier this year. He did and it's been fabulous for Nvidia. Jensen says this deal will be immediately accretive.
Many people think Nvidia is hideously overvalued right now. It has a price to earnings multiple of 82 for heaven's sake. But did you know that it had a similarly ridiculous forward p/e in 2018? When the actual earnings came in, guess what? It turns out that the company was only trading at 20 times earnings. It was cheap! I think the same thing could happen here even if Nvidia is currently worth $313 billion, $100 billion more than the former king of semis: Intel (INTC) .
Or how about this TikTok craziness. This Chinese asset that tens of millions of people love that Microsoft (MSFT) was supposed to buy. Turns out that Oracle (ORCL) wants it and TikTok picked Oracle over Microsoft even as Microsoft is teamed up with Walmart (WMT) which wants the asset for its e-commerce and advertising possibilities.
Oracle's been mum. I don't think we have heard the last of Walmart. Could be a bidding war. And what happens? Oracle's stock goes up three bucks even as Oracle is the classic enterprise company and TikTok is the classic consumer business. Oracle did report a good quarter last week. But without a word about why they even want it, it looks like they and a bunch of private equity firms are going to make it happen. Stunning. Who would have thought that the market wanted Oracle to go B to C!
Oh and get this, Microsoft's stock is up, too. Nobody wanted them to overpay. That had been the fear as recently as last week.
My charitable trust owns a stock called Seattle Genetics (SGEN) . They have been on the show several times. I like the company's anti-cancer drugs which could be every bit as powerful as the one Gilead paid $21 billion for. Merck (MRK) , which has a fantastic cancer franchise, decided not to buy Seattle Genetics but to take a $1 billion stake that values the company at $200. Plus, Merck will give the company $600 million upfront with a possibility of $2.6 billion behind. So the stock moved from $147 where it was last Friday to $172. Last week club members (Action Alerts PLUS member club) were questioning me openly about why I liked this company. I said that it has some formulations that can stop many different forms of cancer. Didn't matter. This stock was just what we call a "down" stock, it just couldn't lift.
Now it's lifting for sure, and so is Merck which advanced a dollar. It was up several dollars most of the day. That's extraordinary. I guess Seattle Genetics and Merck were undervalued.
Finally there's Nikola (NKLA) . Last week we talked about how there were many issues involving this maker of electronic and hydrogen fueled trucks, not the least of which was a video of one of its sample trucks really motoring in a fashion that would make any trucking company want to buy one. Except there's one problem: it was actually filmed on a hill, that's right, even though the trucks looked like they were operating on its own power, it was actually rolling down a hill except it was distorted so you couldn't tell it was a hill.
The company shot back a long rebuttal but I drew a bead on one statement: "Nicola never stated its truck was driving under its own propulsion in the video."
Hmmm. Bad set of facts. Pretty damning.
No matter. Last week GM (GM) bought a $2 billion stake in the company and stood by it when a short seller revealed the fake. The company is adamant that much positive has happened since that unfortunate video. CEO Mary Barra came out and reiterated that it's a good deal and there was a lot of due diligence and that its trucks are very real. The rebuttal worked: the stock's roaring up. Maybe it, too, is worth a lot more than we thought.
Now you could say I am just cherry-picking and these deals are all one-off. However, that's the wrong read. If the market was overvalued and these stocks were too expensive, the acquirers' stock would have gone down, not up.
I think these deals suggest that both tech and, more importantly, biotech, may be causing the bears to question their negativity. I know for a fact that short sellers were banging down both Nikola and Seattle Genetics, and now they are definitively on the wrong side of the trade today. I know Immunomedics had been a laughing stock with CEO after CEO passing through. Oracle is such a slow grower that it got off the growth path ages ago. Maybe this can accelerate it?
What matters is the market has spoken. Big time hedge funds may think that stocks are too high, that they are dangerous, that they are unrealistically high. The companies in these industries, though, who have a much better read and, yes, of course, the last word say they are wrong. Stocks are reasonable. Or even cheap. There will be more sell-offs ahead but remember this day and do not get too negative. You might be very wrong.