If the recent rotation from momentum to value stocks has left you feeling dizzy, there are some signs the room may stop spinning soon.
The concerns that have fueled the moves, including the tapering of Federal Reserve stimulus, weak U.S. economic data and tension in Ukraine, have diminished lately, according to Deutsche Bank AG strategists led by Binky Chadha. Hedge funds are largely finished shifting positions and their biggest stock holdings are no longer getting beaten by the most-heavily shorted shares, according to a Deutsche Bank report today.
Oh yeah, there’s also that flurry of Monday-morning news about potential deals that quickly reached the 12-figure dollar mark when Pfizer Inc. said it’s still interested in AstraZeneca Plc. after the British drugmaker rejected its $98.7 billion offer. Then there’s the arm wrestling going on between General Electric Co. and Siemens AG over Alstom SA.
Accelerating M&A should be one of several catalysts to fuel a “solid” second quarter in stocks following the whiplash caused by the flight from some of the bull market’s highest-flying shares, Deutsche Bank predicts. Ed Yardeni, president and chief strategist of Yardeni Research Inc., said his clients have been discussing the possibility that the bull market is entering the “M&A mania phase.”
GE’s offer for Alstom came amid the biggest month on record for industrial deals, according to data compiled by Bloomberg. In the first quarter, more than 5,000 mergers or acquisitions were struck across all industries globally for a total of $660 billion, a post-financial crisis high, the data show.
Executives who were a little gun-shy about taking risks following the financial crisis may be feeling more optimism about the future, according to Yardeni. And despite the record in the Standard & Poor’s 500 Index earlier this month, the so-called Fed model of stock valuation signals it’s still a decent time to buy. Put simply, the Fed model shows that takeovers are attractive as long as corporate earnings yields are higher than bond yields.
While takeover interest is always a boon for the target companies, investors also appear to approve of the risks that acquiring companies are taking. Take Pfizer, for example. Its shares rose as much as 5.2 percent today. Strategas Research Partners points to the 12 percent jump in Zimmer Holdings Inc. on April 24 after it agreed to buy Biomet Inc. for $13.4 billion.
“This is unusual and suggests that investors are rewarding companies for doing something quickly with cash now earning zero,” Strategas strategists led by Jason Trennert wrote in a report today. “Like it or not, M&A and share repurchases have been far better providers of shareholder value in recent years than” capital expenditures.
To be sure, the last “M&A mania” -- which in 2007 sent the S&P 500 to its first record since the days of the dot-com bubble -- didn’t end well. Hey, no one said seasickness and acrophobia had the same cures.