The M&A Put?

  • Posted by
  • on August 20th, 2010

One shocking hit makes you wonder.  Two might make you run.  Could the offers to buy Potash and McAfee usher in a new phase, maybe even the long-awaited “stock pickers” market?  I think so.

Don’t get me wrong, the bear case for equities has a ton of things going for it.  Secular deleveraging, cyclical profit margin peak, investor apathy, poor technicals…points for the bears.  What I see is not the ushering in of a bull market, but a shift in the way stocks and sectors are perceived.

Actions by two of the world’s largest companies, BHP Billiton and Intel, suggest that the cash burning a hole on their balance sheets might finally be put to work.  Agree or not with the logic behind the offers(Intel for McAfee…huh?), money that is so scarce for consumers and municipalities is bursting through the seams of large corporations.  Even tossing out the amount attributed to GE here, we’re talking about $721 billion in cash just for S&P 500 non-financial companies.

I’m not here to opine on the responsibilities of corporations…Steve Place does a great job of that here.  I care and write about one thing…what is the trade?  Personally, I think it will make traders and fund managers even less likely to short individual stocks and groups, and more likely to use broad ETFs to do their downside speculation.  I think the following steps makes sense:

1) Buy puts instead of selling short. Intraday trades are fine, but any company with a market cap of $3-$30 billion would seem to carry the hidden risk of takeout.  See HEW, DYN, POT(I had puts back in March), MFE(had puts in January). I don’t count GENZ since the premium was small after rumors, but you get the point.

2) Use multiple time frames.  These moves seem outsized in light of day to day trading levels, but when viewed on a longer-term basis are not so radical.

3) Imagine the unthinkable.  Both personal experience and reading the trials of others has given me a respect for risk, and it goes into all of my trade planning.

Considering the premiums offered on these widely followed trading stocks, an objective mind might say there are pockets of undervaluation in this market.  Forget the P/E on the S&P…that’s for “market strategists”.  Remember for a second that real people run these companies, and 2 of the world’s largest have decided to part with cash, not stock, in order to gain efficiency or grow faster.

Whether or not they were burned by one of these deals, hedgies could be burned by the next one…and there will be a next one.  Excluding DYN, none of these names was on the trash heap, they were just in the middle of a long range and someone decided today was the day to make a move.  Could be any of hundreds of names out there as CEOs feel the need to make something happen.

I began studying technical analysis in 1994, and still remember stumbling upon the most beautiful short as I did my Sunday routine with Daily Graphs…Lotus Development(LOTS).  Thing of beauty, trading in the low 30s with all kinds of overhead supply and ready to take another leg down.  Then IBM offered $60/share one Monday, and I was essentially blown out since I had calculated the risk at $2!  That would be the final time I’d be blown out, and since then I’ve used puts instead of shorts for any stocks held overnight.

The point is, these were seismic moves this week, and we will see aftershocks.  Outside of banks with their ridiculous share counts, are there any sectors that couldn’t see action?  It truly should be a stock pickers market, one in which good long ideas are rewarded and offsetting shorts used in SPY & IWM & EFA, etc.  It serves us well as traders to broaden our perspective, and consider the evolving context.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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