How do you determine if stocks got too cheap? Who's the arbiter?
The companies, that's who. The companies that buy other companies at substantial premiums to where they were selling before the deals were announced.
The acquirers are snapping up targets like mad because the targets have seen their stocks collapse from the Great Bear Market of 2018, also known as the Powell-Pow Bear market, because Jay Powell hit stocks Pow! right in the kisser when he set out his automaton rate increase plan at the beginning of October.
Case in point? This morning we woke up to Fiserv (FISV) buying First Data (FDC) in an all equity transaction for $22.74 a share. The creation of this new financial technology payments company is a huge win for First Data shareholders who owned a $17 stock just yesterday. David Faber on CNBC reported that these two companies had been talking for months. Consider this, though: First Data's stock stood at $26 bucks in September before it was felled by an earnings miss. If you are the top dogs at Fiserv you probably loved First Data's credit merchandising business but didn't want to pay $32 for it, which would have been a reasonable premium back then. Now you are paying $10 less: No Deal, Deal!
Two days ago Newmont Mining (NEM) acquired Goldcorp (GG) in a stock for stock transaction valued at $10 billion, a 17% premium to where the stock traded in the last 20 days. It's an immediately accretive deal. But would it have been if Goldcorp was at $13.61 back in July instead of $9.60 when it got the bid? I don't think so.
Or mull Eli Lilly's (LLY) bid for Loxo Oncology (LOXO) a week ago Monday for $235 a share, or $8 billion, to cement's Lilly's role in developing targeted cancer therapies. Sure, it seems excessive when the stock traded at $138 the week before. That's a whopping 68% premium for what is a bit of an unproven technology. But back in July this company's stock traded at $189. I am sure Lilly looked and passed at how much it would have had to pay back then. But the crash from $189 to $138 was an opportunity for Lilly which isn't worried about biotech ETFs or upgrades and downgrades of speculative stocks.
Finally there's the acquisition of Celgene (CELG) by Bristol-Myers (BMY) for $102.43 or $74 billion. This gigantic deal is the classic example of what I am talking about. Celgene was at $66 before the deal. Seems excessive? Wait a second, at $66 Celgene was selling at an almost impossibly low 6 times earnings. This deal only works because of Powell-Pow bear market because this stock was at $92 when Powell talked about bringing down the economy to save it.
Celgene was just too cheap NOT to buy it and it was too cheap because biotech had fallen out of favor in the Wall Street fashion show.
Bristol-Myers doesn't care about the fashion show. It cares about earnings and pipeline and Celgene has both, which is why the deal will be so accretive to Bristol shareholders. Now we know from listening in to the big bank conference calls that there's a ton more deals in the pipe. Again, that's because stocks just got too mutilated to believe. Deals that simply were unworkable four months ago because of price are now being done with alacrity and instead of single stock risk, for once, ETFs be darned, we've got single stock reward.