Big Opportunities in Mergers and Acquisitions
Late on Tuesday afternoon this week, Bloomberg reported that flash memory maker SanDisk (SNDK) hired a bank to explore the sale of the company. Micron Technology (MU) and Western Digital (WDC) expressed immediate interest in the potential purchase.
2015 has seen a significant amount of M&A (merger and acquisition) activity within the semiconductor sector. I mentioned SanDisk’s potential buyout appeal last week, in the inaugural issue of Smart Investing in Turbulent Times, when I featured SanDisk in my new Growth & Income Portfolio. The stock’s already up 14%!
I know you’d love to make a big, quick profit in the stock market on a corporate takeover, and you’re wishing you had owned SanDisk. But I’m not going to tell you to chase SanDisk. The stock could soar on a takeover bid, or it could fall back down if no purchase offer emerges. It has essentially transformed from a longer-term investment into a short-term gamble, and I’m all about managing risk. I’ll make further comments about SanDisk in the weekly updates of Smart Investing in Turbulent Times.
What I can help you with is finding stocks, like SanDisk, that are appealing buyout targets. These are the key features of SanDisk that caused me to put the stock in a model portfolio: projected aggressive double-digit earnings growth in 2016 and 2017, very low P/E, attractive dividend, very low debt ratio and ongoing share repurchases.
As you can quickly surmise, I make my stock decisions based on fundamental analysis. Those excellent financial features certainly enhanced SanDisk’s appeal to potential buyers! So let’s look at another stock with those same features. Whether it rises due to its undervaluation, or due to M&A activity, shareholders will likely benefit either way.
This Stock’s Ready to Reach New Highs
It’s nationwide discount retailer Big Lots (BIG), which sells famous-name and low-priced merchandise in 1,460 U.S. stores.
The company made significant changes in recent years, under the guidance of a new CEO. Big Lots closed its unprofitable Canadian operations and its warehouse business in order to focus on improving its U.S. retail business. In the U.S., it closed 50 stores and planned to open 30 new stores in calendar year 2015. The company is also actively enhancing merchandising and marketing.
As a result of the store closures and the sluggish U.S. economy’s affect on its low-income customer base, revenues are barely growing in 2016 and 2017. However, margins are significantly expanding, leading to increasing EPS (earnings per share) and stock price growth.
Wall Street expects Big Lots’ EPS to grow aggressively by 20.3%, 18.6%, and 20.8% in 2016 through 2018 (January year-end). Quarterly results vary dramatically. The company typically reports its lowest quarterly EPS in its third quarter—often reporting a small net loss—and more than 50% of its annual profits are earned each year in its fourth quarter.
The stock’s 2016 P/E (price/earnings ratio) is 16.6, and the 2017 P/E is 14.0, indicating that the stock is undervalued vs. the EPS growth rate.
The current dividend yield is attractive at 1.55%, and was most recently increased by 12% in April 2015.
The company’s 2015 long-term debt-to-capitalization ratio was very low at 7%, affording the company the freedom to use cash flow to repurchase stock. Big Lots’ outstanding common shares fell from 77.6 million in January 2011 to 54.9 million in January 2015, and repurchases are continuing through fiscal 2016.
Key Attributes: Attractive Fundamentals and Bullish Chart
BIG is a mid-cap stock, well insulated from problems caused by falling commodity prices, a strong U.S. dollar and the slowing Chinese economy.
After reaching an all-time high of 51.50 in March 2015, BIG shares fell steadily through August, then rapidly rebounded on the announcement of a strong earnings beat on August 28. Now that BIG is again pushing against upside price resistance around 51, I expect the stock to break out and begin reaching new highs again very soon.
BIG’s attractive fundamentals and bullish chart led me to feature the stock in my Smart Investing in Turbulent Times Growth & Income Portfolio.
Now is the time to buy this undervalued, aggressive growth and income stock.
Rating: Strong Buy.
Happy investing!
Crista Huff
Chief Analyst, Smart Investing in Turbulent Times
