Carlson: Merger Mania
06/23/2006 12:00 am EST
"Merger mania is alive and well in corporate America, as companies are finding it much faster to buy rather than build businesses," says Chuck Carlson in the DRIP Investor. Here, the advisor looks at a pair of stocks in the financial sector that he considers takeover/merger candidates.
"We believe that 2006 could be one of the strongest years ever for takeover activity, especially if the market's upward trend established in the first quarter resumes. While I don't recommend buying a stock simply because of its takeover potential, it never hurts to own good companies that also have some takeover appeal. In our Editor's Portfolio, a number of stocks stand out as interesting takeover candidates.
"One stock in particular is H&R Block (HRB NYSE). The slowdown in the housing market has hurt the firm's mortgage-related business. Despite its current problems, Block has a lot to offer an acquirer. For starters, the company has some 19 million clients. Certainly having 19 million customers would have ample appeal for another financial-services company looking to expand its customer base.
"Also, Block has some restructuring possibilities. Block stock could move lower in the near term, especially if the market correction becomes more severe. Nevertheless, the stock has decent rebound potential from its current depressed level. I plan to stick with these shares in the near term. I suspect the company's takeover appeal will provide some support at these depressed levels.
"Another Editor's Portfolio stock that has decent takeover potential is Popular (BPOP NASDAQ). Acquisition activity has been heavy in the banking sector. Popular offers a strong position in the Hispanic community- the fastest-growing ethnic group and a target market for many banking concerns. To be sure, the stock has been under heavy selling pressure, as concerns about a slowdown in the mortgage market plus problems at other Puerto Rico-based banks have hurt these shares.
"Admittedly, I've been extremely frustrated with the stock and have been rethinking my positive thesis on these shares. I still believe there is ample value here, and the yield of 3% enhances appeal. Thus, I'm staying with the stock for now and will be watching closely for how the company and stock performs over the next couple of quarters. It will be interesting to see if the stock's depressed price draws a suitor."