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Investing in a stock with the idea of it being acquired is a very poor strategy. It can lead to disastrous results, as most of the time rumors are just that, rumors. Investors that want to gamble on the idea of a company being acquired (and thus profiting from some increase that comes from a purchase price above the current price) should resist the urge to just bet on “black or red.” More appropriately stated, investors should care what the earnings outlook is.
A company that is potentially getting acquired will be able to command a higher purchase price when they are seeing their earnings estimates move higher. The idea of higher earnings estimates also provides a layer of protection to an investment if a potential buyout does not materialize.
The Zacks Rank is designed to help investors locate the stocks that are seeing earnings estimates increase (or decrease). A stock with a Zacks Rank #1 (Strong Buy) is seeing very strong earnings estimate revisions. Combining the Zacks Rank with speculation of a buyout is an excellent way to mitigate risks and still see if the deal gets done.
Speculated Deals
There were several rumors this morning regarding M&A. Let’s take a look at a few names that were mentioned.
Etsy (ETSY - Free Report) was mentioned as a potential takeover target of IAC/InterActive Corp (IAC - Free Report) . Barry Diller is a very under rated titian of the internet. At the same time, ETSY is trading at 132x forward earnings so if there is a premium discussed, it would be enormous. That is not to say this deal will not get done as IAC may not be that concerned with the forward earnings multiple as much as it is with acquiring customers.
Yesterday, there was talk of Boeing (BA - Free Report) taking a long hard look at United Technologies . Both BA and UTX are Zacks Rank #3 (Hold) stocks, but there is something to like about this deal. UTX has a market cap of roughly $91B while BA is just ahead of that level at $97B. This means that this deal would be considered a merger of equals, but it is more than likely that UTX would be paid a big premium.
UTX trades at 17x forward earnings while BA trades at roughly the same level. Here is the rub, BA released some data this morning and it isn’t exactly the type of thing that makes you want to jump into its shares. The company reported that it delivered 748 commercial airplanes in 2016 while it booked 668 net orders. While the semiconductor industry is probably better known for the “book to bill” ratio, this one looks a little weak to me. That said, an a deal with UTX would be a great move now for the company as it wouldn’t be seen entirely as a defensive move.
As far as UTX goes, the price and consensus chart shows that the stock price moved dramatically lower in 2015 when estimates moved lower. More recently the 2017 estimates, as represented by the beige line on the chart, have softened. That makes pulling the trigger on this sort of deal that much harder.
United Technologies Corporation Price, Consensus and EPS Surprise
When a stock has a Zacks Rank #4 (Sell) it tells me right away this is not the time for new investment dollars to be put to work. Kate Spade & Company is a Zacks Rank #4 (Sell) and has seen estimates move lower lately. That said, it was also the subject of recent deal speculation.
A 21x forward earnings multiple is not a super rich valuation for a retailer, but that same sector has seen a lot of volatility lately. Given the recent concerns of margin pressure among many retailer, this deal is one that I would look to avoid.
Kate Spade & Company Price, Consensus and EPS Surprise
Image: Bigstock
Which Rumored Deals Should You Buy?
Investing in a stock with the idea of it being acquired is a very poor strategy. It can lead to disastrous results, as most of the time rumors are just that, rumors. Investors that want to gamble on the idea of a company being acquired (and thus profiting from some increase that comes from a purchase price above the current price) should resist the urge to just bet on “black or red.” More appropriately stated, investors should care what the earnings outlook is.
A company that is potentially getting acquired will be able to command a higher purchase price when they are seeing their earnings estimates move higher. The idea of higher earnings estimates also provides a layer of protection to an investment if a potential buyout does not materialize.
The Zacks Rank is designed to help investors locate the stocks that are seeing earnings estimates increase (or decrease). A stock with a Zacks Rank #1 (Strong Buy) is seeing very strong earnings estimate revisions. Combining the Zacks Rank with speculation of a buyout is an excellent way to mitigate risks and still see if the deal gets done.
Speculated Deals
There were several rumors this morning regarding M&A. Let’s take a look at a few names that were mentioned.
Etsy (ETSY - Free Report) was mentioned as a potential takeover target of IAC/InterActive Corp (IAC - Free Report) . Barry Diller is a very under rated titian of the internet. At the same time, ETSY is trading at 132x forward earnings so if there is a premium discussed, it would be enormous. That is not to say this deal will not get done as IAC may not be that concerned with the forward earnings multiple as much as it is with acquiring customers.
Etsy, Inc. Price and Consensus
Etsy, Inc. Price and Consensus | Etsy, Inc. Quote
Mega Deal?
Yesterday, there was talk of Boeing (BA - Free Report) taking a long hard look at United Technologies . Both BA and UTX are Zacks Rank #3 (Hold) stocks, but there is something to like about this deal. UTX has a market cap of roughly $91B while BA is just ahead of that level at $97B. This means that this deal would be considered a merger of equals, but it is more than likely that UTX would be paid a big premium.
UTX trades at 17x forward earnings while BA trades at roughly the same level. Here is the rub, BA released some data this morning and it isn’t exactly the type of thing that makes you want to jump into its shares. The company reported that it delivered 748 commercial airplanes in 2016 while it booked 668 net orders. While the semiconductor industry is probably better known for the “book to bill” ratio, this one looks a little weak to me. That said, an a deal with UTX would be a great move now for the company as it wouldn’t be seen entirely as a defensive move.
As far as UTX goes, the price and consensus chart shows that the stock price moved dramatically lower in 2015 when estimates moved lower. More recently the 2017 estimates, as represented by the beige line on the chart, have softened. That makes pulling the trigger on this sort of deal that much harder.
United Technologies Corporation Price, Consensus and EPS Surprise
United Technologies Corporation Price, Consensus and EPS Surprise | United Technologies Corporation Quote
Bag This Deal
When a stock has a Zacks Rank #4 (Sell) it tells me right away this is not the time for new investment dollars to be put to work. Kate Spade & Company is a Zacks Rank #4 (Sell) and has seen estimates move lower lately. That said, it was also the subject of recent deal speculation.
A 21x forward earnings multiple is not a super rich valuation for a retailer, but that same sector has seen a lot of volatility lately. Given the recent concerns of margin pressure among many retailer, this deal is one that I would look to avoid.
Kate Spade & Company Price, Consensus and EPS Surprise
Kate Spade & Company Price, Consensus and EPS Surprise | Kate Spade & Company Quote
Follow Brian Bolan on Twitter @BBolan1