Tuesday's approval by U.S. District Court on AT&T's (T) proposed $85 billion acquisition of Time Warner (TWX) is expected to open the floodgates to a wave of consolidation across corporate America. The top-performing stocks on the S&P 500 today were companies that are either already involved in merger activities or hold the potential for deals in the future.
Shares of Time Warner jumped 2.97% to $99.19 in midday trading Wednesday while AT&T was down 4.48% to $32.73.
'The court ruling is significantly important because it will affect the process and pace of broader M&A activity which is also seen as another significant upside catalyst for the market,' Ivan Feinseth, chief investment officer and director of research of Tigress Financial Partners, wrote in a research report.
Buoyed by Tuesday's decision, Comcast (CMCSA) is likely to make a bid for 21st Century Fox (FOXA) assets at a premium to Disney's (DIS) outstanding offer. Fox shares jumped 7.3% at $43.92. (Rupert Murdoch and his family are major shareholders in both Fox and News Corp. (NWSA),.
Discovery (DISCA), which merged with Scripps Networks Interactive earlier this year, was up 3.79% at $25.01. CBS (CBS) and Viacom (VIAB), which have been in merger talks, gained 2.81% and 2.65%, respectively.
The ruling could also a positive impact on plausible health-care deals. Credit Suisse analyst Erin Wilson Wright, wrote, 'While the T/TWX trial is not directly related to our health-care universe, we broadly view the favourable legal precedent provides an encouraging read-through for the proposed CVS Health/Aetna and Cigna/Express Scripts vertical deals." Both these deals were under Department of Justice scrutiny.
Pharmacy chain CVS Health (CVS), which plans to acquire Aetna (AET) for $69 billion, rallied up 2.79% to $68.22. Aetna's stock was also up 3.89% at $187.64. Pharmacy benefits management company Express Scripts (ESRX), which has agreed to be purchased by Cigna (CI) for $52 billion, was up 3.98% to $82.28. Cigna's stock slumped 1.83% to $175.74.
Stan Majcher is the co-manager of the Hotchkis & Wiley Mid-Cap Value fund (HWMIX), which ranks among the top 1% of its peer group for one- and 10-year performance, according to Morningstar. Over the past decade, it has turned $10,000 into $30,904, versus $23,216 for the typical mid-cap value fund and $25,385 for the S&P 500.
During the global financial crisis, Majcher made some lucrative, contrarian bets on financials. More recently, he has benefited from above-average exposure to energy.
'We don't set out to be contrarians, but the search for value sometimes leads us to contrarian holdings,' says Majcher. Right now, he notes, many investors are still bearish on oil despite its recent price rise, expanding U.S. production, and other factors. But demand growth appears stronger than expected, and U.S. bottlenecks'including a shortage of pipeline capacity from the prolific Permian Basin'won't be resolved for another year or two, he says.
Kosmos Energy (KOS) is an independent exploration company focused on frontier markets like Africa and South America. The stock price has fallen by more than half in seven years. Many of Kosmos' rivals have deemphasized offshore drilling, and that has provided an opportunity to buy assets cheaply, says Majcher.
Jefferies analyst Mark Wilson recently upgraded Kosmos to Buy from Hold, and raised his price target to $9.50 from $7.10, implying 17% upside from recent levels. He cites an exploration program off the coast of Suriname as particularly promising. Shares were up 0.8% on Tuesday, at $8.18.
Apache (APA) is a Houston-based explorer that has been focusing investment dollars in a massive oil and gas find it calls Alpine High, located on the outskirts of the Permian Basin. 'Investors are worried because of the amount of natural gas associated with it, because gas isn't as lucrative as oil at the moment,' says Majcher. 'What we focus on is, What are the returns on the cash you put in' This is a high-return asset, and we don't think its value is included in the share price.'
Apache stock, too, is selling for less than half what it fetched seven years ago. Just nine of 30 analysts who cover it recommend a purchase of shares. It was trading down 1.9% on Tuesday, at $43.72.