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The World's Most Unpopular Investment

By Tom Dyson, publisher, The Palm Beach Letter
Monday, July 23, 2007

"The Biggest Deal Boom – Evaah!" exclaims a Wall Street Journal headline.

"This year's mergers wave is, by any measure, the biggest, baddest, bestest, boldest (did we mention cliche-ridden?) in history," the story continues.

In the first six months of 2007, corporations from around the world announced $2.7 trillion in takeover deals. That's on pace to clear $5 trillion for the year. Here's how previous years have stacked up:

1995:
$1.11 trillion
1996:
$1.37
1997:
$1.92
1998:
$2.83
1999:
$3.87
2000:
$3.90
2001:
$1.99
2002:
$1.47
2003:
$1.56
2004:
$2.19
2005:
$3.04
2006:
$3.86
2007:
$2.33 (through May 21)
Source:
WSJ

Here are a few more signs of the times: The average deal size rose by 58% to $298 million, the highest on record. So far this year, corporations have struck 465 deals worth more than $1 billion each. Competition for deals is now so fierce, transactions are taking place at large premiums to the targets' stock prices... for example:

Rupert Murdoch's recent bid was 56% above Dow Jones' stock price. Alcoa's bid for Alcan in May was 33% above Alcan's stock price. Anadarko paid 40% more than Kerr-McGee's stock price.

Life looks good in the takeover space right now... wouldn't you say?

But what if I told you that one industry out there is in such a crisis that firms don't merge in the pursuit of profit...

They use takeovers to stave off bankruptcy.

In this "crisis industry," they don't speak of "takeover premiums" like the folks at KKR and Goldman Sachs do...

In this crisis industry, they speak of "takeover discounts." With discount takeovers, investors are so willing to dump their stock, they let predators buy their shares at a discount to the market price. They should call them "takeunders."

Knowing how unpopular these companies must be, wouldn't you snap up every share you could find?

Jim Rogers is a famous speculator, renown for his unconventional investments... like buying German stocks in 1982, U.S. Treasury bonds in 1981 and 1982, and Ghana in the 1990s.

A few years ago somebody asked Jim how he handled his losing trades. "I don't have losing trades," he replied.

Jim Rogers knows when the bad news is fully priced in, a stock can't fall any further. There's just no downside. And when an asset can't get any cheaper, it goes up. That's how Jim Rogers is never wrong... he only buys hated assets.

Regional banks are so hated, we're seeing takeunders. Two happened recently:

Last month, PNC Financial bought a 33-branch Rust Belt bank called Yardville National Bancorp. It paid 2% less than Yardville's closing share price.

The month before, Wells Fargo bought Greater Bay Bancorp for $28.50 a share. The smaller bank had been trading at more than $29 a share on the day before the deal was announced.

In other words, sentiment is so unpopular that shareholders are prepared to sell their bank stock for less than market price, in the middle of the hottest ever take over market in history. This is amazing.

"The prices of such deals underscore the fact that small banks that once thought they could weather the industry's troubles are now willing sellers," said the WSJ. "In particular, banks have been hurt over the past year by an inverted yield curve."

A negative yield curve really hurts regional banks. But so do soggy housing markets. Look how this collection of regional banks from Michigan has fared recently...

Stock Performance of Michigan Banks and Thrifts

Company Name

Ticker

YTD change (%)

Capitol Bancorp Ltd.

CBC

-40%

Independent Bank Corp.

IBCP

-41%

Citizens First Bancorp, Inc.

CTZN

-35%

Macatawa Bank Corp.

MCBC

-30%

Mercantile Bank Corp.

MBWM

-40%

Citizens Rep. Bancorp

CRBC

-31%

MBT Financial Corp.

MBTF

-12%

Flagstar Bancorp, Inc.

FBC

-20%

Chemical Financial Corp

CHFC

-24%

In sum, regional banking – especially in the American Rust Belt – is the most hated sector of the stock market right now. If Jim Rogers hadn't moved to China last year, I bet he'd be loading up on these bargains...

I know I am.

Good investing,

Tom




Market Notes


NEW HIGHS OF NOTE LAST WEEK

ExxonMobil (XOM)... Big Oil
Suncor Energy (SU)... oil sands
Schlumberger (SLM)... oil services
Tidewater (TDW)... oil services
CHC Helicopter (FLI)... oil services
OYO Geospace (OYOG)... oil services
Helix Energy Solutions (HLX)... oil services
National-Oilwell Varco (NOV)... oil services
Chicago Bridge & Iron (CBI)... infrastructure
Jacobs Engineering (JEC)... infrastructure
Foster Wheeler (FWLT)... infrastructure
Quanta Services (PWR)... infrastructure
Shaw Group (SGR)... infrastructure
Cummins (CMI)... diesel engines
Paccar (PCAR)... heavy trucks
Terex (TEX)... heavy equipment
Bucyrus (BUCY)... heavy equipment
Caterpillar (CAT)... heavy equipment
Ritchie Brothers (RBA)... heavy-equipment auctioneer
Intel (INTC)... blue-chip tech
Cisco (CSCO)... blue-chip tech
Apple (AAPL)... blue-chip tech
Oracle (ORCL)... blue-chip tech
Google (GOOG)... blue-chip tech
Lead, Tin, Canadian Dollar


NEW LOWS OF NOTE LAST WEEK

U.S. dollar
D.R. Horton (DHI)... homebuilder
Meritage Homes (MTH)... homebuilder
Beazer Homes (BZH)... homebuilder
Circuit City (CC)... electronics retailer
Redwood Trust (RWT)... REIT
Travelzoo (TZOO)... online travel

-Brian Hunt


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