Wyatt Research Week in Review: Oct. 25-31

It’s official: 2015 is the year of the merger.
Where to begin? For starters, there’s Charter Communications’ (NASDAQ: CHTR) pending $55 billion cash-and-stock deal to acquire Time Warner Cable (NYSE: TWC), which followed AT&T’s (NYSE: T) $48.5 billion purchase of DirecTV.
Or how about Royal Dutch Shell’s (NYSE: RDS-A) nearly $70 billion splurge on British oil and gas player BG Group (OTC: BRGYY).
Then there’s the meaty $46 billion Kraft Heinz (NASDAQ: KHC) tie-up, orchestrated by Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) and his friends at Brazilian buyout firm 3G Capital. And Buffett wasn’t done: In August, Berkshire Hathaway announced that it will acquire aerospace supplier Precision Castparts (NYSE: PCP) for $37.2 billion, including debt, in the largest purchase in Berkshire’s history.
More recently, we’ve seen the $100 billion-plus marriage of beer barons Anheuser-Busch InBev (NYSE: BUD) and SABMiller (OTC: SBMRY) – the details of which are still being ironed out – and privately held Dell Inc.’s $67 billion outlay for EMC Corp. (NYSE: EMC), the biggest tech merger ever.
As Forbes magazine reported last week, using data from Thompson Reuters, merger-and-acquisition activity is poised to set a record in 2015. As of Oct. 22, there was $3.2 trillion worth of M&A deals either completed or in the works year-to-date.
So it didn’t come as a big surprise when a pair of significant deals were announced this week.
First there was the news that Walgreens Boots Alliance (NASDAQ: WBA) has agreed to buy Rite Aid (NYSE: RAD) for roughly $9.4 billion. The deal comes in the wake of CVS Health’s (NYSE: CVS) $10.4 billion ($12.7 billion including debt) acquisition of pharmacy services provider Omnicare, which was finalized in August. If completed, the Walgreens deal will give the pharmacy giant 46.5% market share, compared to CVS’s 30.9%.
Then on Thursday it was reported by The Wall Street Journal that Big Pharma behemoth Pfizer (NYSE: PFE) is in talks to merge with Allergan (NYSE: AGN). Details are very preliminary, but should the deal get done it would easily eclipse the $100 billion mark and could end up being the biggest merger of 2015.
So why all the wheeling and dealing? In Pfizer’s case, the merger with the Dublin-based Allergan would reduce tax impacts because of Ireland’s lower corporate tax rate.
But in general, M&A mania is simply a product of the market climate. The low inflation figure constantly invoked by the Federal Reserve, combined with Fed-dictated low interest rates – which encourages the acquisition of debt – have coalesced to create a situation in which companies feel compelled to keep up with the Joneses with bigger and better deals.
“Everybody else is doing it, so why can’t we?” is the mode of the day, and if the first three quarters of 2015 are any indication, expect a few more blockbuster deals before the ball drops on 2016.
Here are some of my favorite Wyatt Investment Research articles from the week:
Will the Fed Finally Raise Interest Rates in December? – The Federal Reserve concluded its latest two-day policy meeting on Wednesday, and while the central bank left the federal funds rate near zero, in a rare move it included fairly strong language that a December rate hike is highly possible.
3 Discounted REITs With Inflated Growth Potential – After a sizable run over the last few years, real estate investment trusts have slowed down. Real estate values have rebounded nicely, yet the market values of REITs haven’t kept pace. But historically, REITs have traded close to net asset value, suggesting that these discounted REITs should have big upside as we head into the holiday season.
Is a ‘McREIT’ on the McDonald’s Menu? – Despite signs that a turnaround is underway, activist investors like Larry Robbins of Glenview Capital Management are pushing for a McDonald’s (NYSE: MCD) REIT spinoff. But there are strong doubts that McDonald’s will pursue the REIT idea, since in the minds of many pundits McDonald’s is basically a real estate company that sells burgers on the side.
This Fast-Food Stock Is Eating Chipotle’s Lunch – Fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG) was, until recently, one of the market’s darling growth stocks. The stock is up 210% in the past five years, while the S&P 500 index is up 75% in the same time. But its momentum has slowed down significantly this year. The stock fell 6% after reporting weak quarterly earnings on Oct. 21, and it’s now in the red for the year. Meanwhile, one of Chipotle’s fiercest competitors – which trades at a cheaper valuation, is growing faster, and even pays a dividend – is quickly gaining ground.
Top 5 Steve Jobs Lessons – Steve Jobs will no doubt go down in history as one of the great American inventors and innovators, alongside Thomas Edison and Henry Ford. And with the Danny Boyle-Aaron Sorkin biopic “Steve Jobs” currently in wide release, now’s a good time to look back on some of the timeless and universal lessons that can be learned from the career of the Apple (NASDAQ: AAPL) co-founder.
Time to Buy Natural Gas Stocks? – The baby has been thrown out with the bathwater, so to speak, when it comes to natural gas stocks. With oil falling over 60% from its 2014 highs, the market isn’t separating oil from natural gas, having extrapolated the recent pain in oil stocks to natural gas stocks. But it appears there’s a lot of fear priced into natural gas stocks – too much fear, perhaps. Bottom fishing isn’t for everyone, but for long-term investors willing to sit through some near-term volatility, three stocks look particularly enticing.
The Curious Case of Prospect Capital and Its 14% Dividend Yield – Business development companies attract income investor attention because of their high-yield dividends. Prospect Capital Corp. (NASDAQ: PSEC) is no exception. Its current yield is close to 14%. The yield is a selling point even management can’t help emphasizing. But while Prospect Capital’s dividend yield has been maintained, the dividend payout hasn’t.
The Best Big Bank Stock, Period – Much of the market has a love-hate relationship with the financial industry following the 2008 financial crisis. Despite the worst being behind us, many investors still aren’t sure how profitability shakes out in light of regulatory changes. But the best big bank stock has industry-leading returns on capital, a solid dividend yield and a clean balance sheet. It’s been growing revenues despite low interest rates, due to its strong position in mortgage lending and originations. And unlike other big banks, it’s managed to sidestep having to make large divestitures or pay sizable compliance costs.
Have a great weekend!