Contrarian Alert: Takeover Fever Expands Beyond Homebuilder Space
When everyone is looking in the same direction, it pays off to look elsewhere.
Contrarian investors know that patiently looking for value while the crowd piles on the latest craze often pays off handsomely. We may be witnessing one of those moments as Wall Street is looking the wrong way focusing on tariffs and other issues over which they have no control while right under their noses, something meaningful may be starting to kindle; a new wave of mergers and acquisition.
Image courtesy of freepik.com
One thing you can say about bear markets is that they create bargains. And over the last few days, we’re starting to see something we haven’t seen in a long time, nearly daily news of companies merging. I’ve been waiting for this for a while, as I noted here.
It started, as I recently noted, earlier this week, with a unit of Apollo Group (APO) purchased Landsea Homes (LSEA). This was followed by Dick’s Sporting Goods (DKS) buying Foot Locker (FL). This morning, the news broke that the number two and number three cable companies, Charter (CHTR) and privately held Cox Communications are merging.
In addition, two privately held Texas homebuilders Scott Felder Homes and Olivia Clarke Homes tied the knot with Felder dolling out the cash to Olivia. That’s two mergers in the homebuilder space in two days in addition to the steady stream which has been building for the past several months, as I described here.
There are no coincidences. That’s four mergers in four days, which suggests that we may be in the early stages of a consolidation phase. As I noted here, one of the most beaten down sectors is the homebuilders, where the supply and demand equilibrium is in their favor due to the still present and ongoing demographic currents, relocation to the sunbelt.
There are clear potential winners and losers in any merger and acquisition binge, which I will be delving into in this weekend’s Market Summary report. For now, I will once again reiterate that the homebuilders are a primary sector for consolidation as low stock prices combined with attractive valuations, lots of cash on the balance sheets and the ability to keep up healthy profit margins during a tough market makes the smaller companies in the sector attractive to larger companies looking to expand market share.
The iShares U.S. Home Construction ETF (ITB) continues to consolidate while money flows into the sector stabilize as evidenced by a stealthy uptick in the OBV line which is an excellent barometer for money flows from long term investors.
I’ve been patient with the homebuilders for the past year and own shares in several currently. I’ve also built a sound homebuilder grouping in my Weekender Portfolio, which I will be updating this weekend.
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