[Charts] Dealmakers Delight and Retailer's Fright

Lou Basenese

Friday, October 1, 2021

When Fridays roll around in the TTD Nation, we roll out the charts.

All it takes is a quick glance — and you’ll be up to speed and poised to profit from the market’s most important trends.

This week, I’m dishing on the promising surge in Mergers & Acquisitions funded with stock, as well as one stock everyone should sell before it’s too late.

So without further ado...

Let’s Make a Deal

I know cash is supposed to be king. But when it comes to consummating Mergers & Acquisitions, management teams are increasingly turning to stock.

Per Refinitiv, roughly 6% of U.S.-based deals involve stock. That might seem like a sliver, but it’s the biggest share in a decade.

And in dollar terms, it’s significant. As you can see below, it’s topped $800 billion.

(click image to enlarge)

The takeaway? Runaway bull markets are never a deterrent to dealmaking because companies have two “currency” choices — cash or stock — to get deals done, depending on market conditions.

Right now, rising stock prices put acquirers in a flush position to make big buys at record-breaking premiums.

And for takeover targets and their investors, that means record profits lie straight ahead. As long as we invest before a deal is announced.

Or as deal attorney Bill Doran summed it up, “Those who are using stock — their currency is highly valued. It’s allowed them to meet the pricing demands of those who are ready to sell.”

I’m going to make sure we’re on the right side of this trend. So keep an eye out for more details in the coming weeks.

Bye Bye, BBBY

Longtime readers know that I love the market truism that “Stock prices ultimately follow earnings.”

Why? Because stock prices do follow earnings!

To prove it, I typically usher in this chart. It shows the trailing 12-month earnings per share for S&P 500 companies versus the price performance for the S&P 500 index.

(click image to enlarge)

As you can see, aside from temporary and short-lived dislocations involving major economic events (think dot.com bust, the Great Recession, etc.), the correlation couldn’t be any stronger.

Big whoop, you say? It is a big whoop. Because it means earnings are a reliable leading indicator of future stock prices.

Simply put, if earnings are headed higher, so is a stock. And vice versa — which shareholders of Bed Bath & Beyond Inc. (BBBY) learned the hard way this week.

In a single day, shares cratered a cringe-worthy 22% on a 92% drop in earnings per share, from $0.50 in fiscal Q2 2020 to just $0.04 in fiscal Q2 2021.

Ouch!

(click image to enlarge)

Blame it on supply-chain bottlenecks... increasing online competition… rising transportation costs… inflation… and the list goes on and on.

Making matters worse, management slashed sales and earnings guidance for the quarter ahead. I bet you the downturn lasts more than just a quarter, though.

So if share prices ultimately follow earnings — and they do (see above, Mr. Forgetful) — this stock is headed lower. Much lower, in fact.

Of course, few investors like to short-sell stocks. Many don’t even know how to do it. And those who do aren’t comfortable with the unlimited risk that’s associated with it.

But fear not! Today’s Trend Trader Pro recommendation provides a cheap, easy, and decidedly low-risk way to make a massive profit as Bed Bath & Beyond’s struggles continue. Don’t miss out!

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Ahead of the tape,
Lou Basenese
Lou Basenese

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