The stock market has been dealing with many variables over the last week or so but the one constant over the past 7-8 years inserted itself into the US Stock market narrative once again over the last 24 hours, takeovers!
General Dynamics announced a deal to buy CSRA and Walgreen's approaching Amerisource about the purchase of the 76% of ABC stock that it doesn't already own. ABC is up about 9% today on the rumors of the deal and CSRA was positive about 32% yesterday on the announced nearly $10b offer from GD including about $2.6b of debt.
One of the best kept secrets of this US stock market is the shrinking share count available to investors to purchase. Over the last half dozen years or so nearly $7T, yes, that's TRILLION, has been taken out of the market due to 2 factors: mergers and acquisitions (takeovers included) and stock buybacks. Stock buybacks make up about $4.5-5T of that number with the remaining due to M&A. You may ask "why is that important?" well, namely Earnings Per Share or EPS.
As shares decrease over time, the amount of attributable earnings which are spread over those shares can either rise, stay the same or fall. In two of those cases, staying the same or rising earnings means greater EPS. Even in a falling earnings environment, depending on the rate (the ratio between the two) at which shares are being retired, EPS does not necessarily have to fall.
Some would argue that share repurchases by themselves are not indicative of future positive stock performance and in certain cases, like IBM, they might be correct. But in general, share repurchase programs are but a function of an overall capital return program to shareholders and not the strategic blueprint for a company's success. Point being, IBM's lagging performance over the last decade is about operational and management miscues, not a buyback.
With this as a backdrop I looked at both of the above deals and searched out possible investing set-ups, taking into account: competitors, sector, option volatility levels and other possible external catalysts.
In either case, neither provides for a clear cut "we should buy XYZ because it's very clearly the next target" but in looking at both sectors, Defense/Aerospace and Drug Distribution Supply Chain, I did find two exceptional Zacks Rank #2 stocks in Defense and one Zacks Rank #2 stock in Drug Distribution. I'll begin with the two Defense stocks.
Lockheed Martin (LMT - Free Report) : a defense stock darling and a Zacks Rank #2, sports a 2.31% dividend yield and sits squarely in what may be one of the strongest defense spending cycles we have seen in decades. This is part of my "external catalyst" thinking and along with the current elevated option environment, owning the stock here, $350ish, and selling the June 370 calls for $8.00 is a nice 22.5% annualized yield if taken out of the position above $378.
Along the way, you also pick up one quarter of the annual $8 dividend so an extra $2 of return to tack on. Zacks has earnings estimates for LMT increasing 15.71% for the current FY and although LMT trades at a peer and market multiple, its cash flows are prodigious dwarfing the industry average and are approximately 50% greater than GD.
Lockheed Martin Corporation Price and Consensus