Unsurprisingly, the novel coronavirus bought corporate mergers and acquisitions activity to a halt. But that should change, making buyout stocks an intriguing group over the next few months and into 2021.
After all, broad markets are back near all-time highs, signaling a return of investor and business confidence. Interest rates are at historic lows, making it cheaper to raise the debt needed to fund acquisitions. After a first half in which global deal value declined 41% year-over-year, a rebound seems likely.
To be sure, takeover rumors are constant. And so there are always many more potential buyout stocks than there are actual buyout stocks.
As a result, investors can’t own a stock simply on the hopes of acquisition. There needs to be a solid fundamental case underpinning the position — with buyout potential just an added bonus.
In varying ways, these 10 stocks all meet those criteria. All 10 seem like intriguing targets for larger players, or in some cases private equity firms. On their own, meanwhile, each has a path to a rally.
For investors looking for long-term value plus a possible near-term catalyst, these 10 names all look attractive:
- At Home Group (NYSE:HOME)
- Aaron’s (NYSE:AAN)
- ViacomCBS (NASDAQ:VIAC, NASDAQ:VIACA)
- Yamana Gold (NYSE:AUY)
- BlackBerry (NYSE:BB)
- Xilinx (NASDAQ:XLNX)
- Sprouts Farmers Market (NASDAQ:SFM)
- Dropbox (NASDAQ:DBX)
- XPO Logistics (NYSE:XPO)
- RingCentral (NYSE:RNG)
Buyout Stocks: At Home Group (HOME)
Investors looking for buyout stocks in brick-and-mortar retail usually have been disappointed. Shareholders hope for a potential white knight — which so often seems to be Amazon.com (NASDAQ:AMZN) — while the share price keeps slipping away.
But At Home Group could be an exception to the rule. There are few names in retail better-positioned right now. The bankruptcies of Pier 1 Imports (OTCMKTS:PIRRQ) and Tuesday Morning (OTCMKTS:TUESQ) will remove at least some competitive locations. Shopping is shifting online just as At Home is building out its omnichannel market.
Admittedly, HOME stock did plunge after earnings last week. But it’s not as if the performance in the quarter was poor. In fact, it was impressive. Same-store sales rose a whopping 42% year-over-year.
Private equity could be interested, given that the company has paid down a good chunk of the debt issued when two firms teamed up to buy the company back in 2011. But a strategic acquisition perhaps makes more sense.
Last year, Kohl’s (NYSE:KSS) reportedly kicked the tires. And there is a logical buyer out there in Ross Stores (NASDAQ:ROST). Ross has seen its stock underperform rival TJX Companies (NYSE:TJX) by 10 percentage points so far this year. One key reason why is that TJX’s HomeGoods nameplate is benefiting from the pandemic in a way that its off-price business has not. Ross could move into that category to keep with up TJX — and pick up some valuable e-commerce experience and users at the same time.
And if a buyer doesn’t materialize, HOME still looks attractive after the sharp pullback. A 12x forward price-earnings multiple is hardly onerous given whitespace potential and strong comp sales. All told, there’s a lot to like here.
All of Aaron’s likely is not going to be sold. Along with second-quarter earnings in late July, Aaron’s announced its plan to split into two separate companies. The namesake rent-to-own business will be spun off, leaving Progressive Finance, which provides lease-to-own financing for third-party retailers.
The market liked the move, bidding AAN stock up some 20%. And it does make sense. The two units have very different profiles. Progressive is investing behind growth, while Aaron’s is a more mature business.
Once Aaron’s is spun off, it quickly gets added to any list of buyout stocks. The combined company has minimal debt, and Aaron’s likely will as well after the spin. That would allow a private equity firm to fund a deal through debt, and the industry already likes the rent-to-own model. Rival Rent-A-Center (NASDAQ:RCII) agreed to a buyout back in 2018 before backing out. The would-be buyer, Vintage Capital Management, owns the sector’s third-largest player, Buddy’s Home Furnishings.
Admittedly, valuation is a bit of a concern. Indeed, I recommended against AAN stock back in October, particularly for investors worried about a looming downturn. But AAN is about 25% cheaper than it was then, and solid Q2 results suggest both units managed well despite the economic dislocation caused by pandemic-driven shutdowns. Meanwhile, there’s at least one catalyst on the way in the spin — and perhaps another in buyout rumors surrounding Aaron’s.
Buyout Stocks: ViacomCBS (VIAC, VIACA)
Media companies too have been waiting for their white knight. Their shareholders have often believed that Amazon is set to ride in — and generally seen declining share prices in the meantime.
There is still a significant risk that the trend will hold. Cord-cutting accelerated during the pandemic, adding further pressure to affiliate fees booked by the likes of ViacomCBS, AMC Networks (NASDAQ:AMCX) and Discovery Communications (NASDAQ:DISCA). A fragmented landscape presents a substantial stumbling block to any turnaround. And, again, acquisition rumors have swirled around the space for years, yet there has been essentially no movement.
Even with those caveats in mind, VIAC stock does look intriguing at the moment. Few stocks in the market are cheaper (though that group includes both DISCA and AMCX). The Paramount Pictures business should have value. And the passing of Sumner Redstone last month seems to leave ViacomCBS more open to a sale.
Again, there are real “value trap” concerns here. But there is real upside if ViacomCBS can find a buyer — and it only takes one.
Yamana Gold (AUY)
At this point, investors can likely add any small- to mid-sized gold miner to their list of potential buyout stocks. We have already seen consolidation among the majors, with Barrick Gold (NYSE:GOLD) and Randgold and Newmont (NYSE:NEM) and Goldcorp. A soaring gold price has sparked optimism toward the sector: Even Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) now owns a stake in Barrick.
Meanwhile, as an industry analyst noted, the pandemic led to a sharp cut back on exploration activity. The majors need to add resources — and M&A may be the preferred way.
The one potential stumbling block is that miners are trying to convince investors that their profligate ways, and history of value destruction, is behind them. But M&A using stock, as opposed to cash, could be a way around that problem, particularly with share prices up sharply so far in 2020.
Yamana could be an attractive target for that kind of deal, and has some value on its own. The company itself is looking to improve execution after a disappointing couple of years. Both producing mines and development properties look attractive. And the company, with a market capitalization just over $6 billion, seems to be the right size. It is big enough to move the needle, but small enough to not be a “bet the company” type of deal.
Again, investors have their pick of smaller gold stocks to play a takeover thesis. But AUY stock should be on their list.
Buyout Stocks: BlackBerry (BB)
Obviously, BlackBerry has been one of the market’s most frustrating stocks. The company’s smartphone glory days obviously are long since past, but the pivot to being a security software play hasn’t worked out, either. BB stock hit a 16-year low in October, and then fell to lower lows during the March selloff. Even after a bounce, shares are down 30% over the past five years.
At some point, the story probably needs to end. And it could have a modestly happy ending. BlackBerry does have a viable business in automotive security. And the growth of WiFi-enabled automobiles, not to mention autonomous vehicles, should drive demand going forward.
Again, BB has been a disappointment for over a decade now, and investors would be forgiven for assuming the worst about the future. But there is likely some value here, BlackBerry just needs to finally find a way to realize it. A sale at this point seems the simplest way to do so.
Semiconductor developer Xilinx has been considered a takeover target for years. The biggest concern is that no deal has arrived yet.
After all, the likes of Broadcom (NASDAQ:AVGO) and Qualcomm (NASDAQ:QCOM), both rumored acquirers, have had all that time to make an offer — and haven’t done so. And, in the meantime, XLNX stock has become only more expensive: Shares have rallied 153% over the past five years.
Still, there is enough here, particularly for chip bulls. With the likes of Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) boasting valuations in the stratosphere, XLNX is a solid play on sector growth. A recent deal with Subaru (OTCMKTS:FUJHY) highlights Xilinx’s capabilities with advanced driver-assistance systems and, eventually, autonomous vehicles.
Bear in mind that Intel (NASDAQ:INTC) paid over $15 billion for Mobileye and its automotive expertise. A price tag roughly double that for Xilinx, which is far more profitable, might be palatable for one of the chip giants, even if they have not moved yet.
Buyout Stocks: Sprouts Farmers Market (SFM)
There is a solid case for Sprouts Farmers Market, particularly with a recent pullback. On its own, SFM looks attractive. A forward P/E multiple below 13x is reasonable by the standards of the sector. The balance sheet has less leverage than most larger grocery plays. And the company’s niche in fresh and organic foods engenders customer loyalty.
Of course, those same characteristics could make Sprouts a takeover target for the likes of Kroger (NYSE:KR) or Albertsons (NYSE:ACI). A price tag likely in the range of $4 billion including debt would be manageable for both companies. Here, too, private equity could have a say: Rival The Fresh Market was taken over back in 2016, which sparked rumors that Sprouts would be next. Western chain Smart & Final was taken private for the second time just last year.
One of the issues in this market is that buyout stocks often are priced rather high. SFM seems a nice combination of value and takeover potential.
Dropbox seemingly has been on the list of buyout stocks since it went public in March 2018. That speculation has done nothing for DBX stock, which actually sits below its initial offering price.
That trading over the past two and a half years highlights the biggest risk — that Dropbox simply is getting left behind. It is fair to worry that if a tech stock can’t rise in this market, it likely won’t rise in any market.
But this still is a company growing revenue at a mid-teens clip. DBX stock seems reasonably valued relative to both revenue and adjusted profits. A strong brand and a large user base could be of interest to one of the tech titans, and an $8.3 billion market capitalization means a Dropbox buyout would be manageable. For investors who struggle to see value in tech, DBX at least is worth a look.
Buyout Stocks: XPO Logistics (XPO)
As Barron’s put it last month, XPO is a “mini-transportation conglomerate,” with businesses including less-than-truckload (LTL) shipping and freight brokerage. The site noted an analyst upgrade for XPO stock, with a price target of $110.
That target sits about 26% above XPO’s current price. And it is not an unrealistic estimate. XPO trades at about 25x next year’s earnings estimates, not an onerous multiple in this market. And there are catalysts on the way.
XPO in January said it was considering strategic alternatives, which could include spinoffs of one or more of its businesses. But it is also possible, particularly as normalcy returns, that XPO’s potential move could lead a buyer to step in.
The most likely buyer is Home Depot (NYSE:HD), which long has been linked to XPO. Another potential buyer is Amazon, which could add to its already-impressive supply chain and logistics capabilities. The logic of an Amazon deal is one reason why Home Depot has been considered a potential acquirer.
XPO certainly needs the economy to cooperate. But if it does, there are several paths to upside.
The biggest concern for communications provider RingCentral is valuation. Somewhat quietly, RNG stock has been one of the best performers in the market lately. It has rallied 560% in the last three years, and a whopping 1,500% over the past five.
After the rally, the stock admittedly looks expensive at 250 times next year’s consensus EPS estimate. But growth continues to impress, with revenue rising 29% in the second quarter. And here, too, acquisition rumors have swirled for years.
The good news for RNG stock is that its cloud-based platform makes sense for a number of tech titans. The bad news is that even those titans may not be willing to pay a premium to what looks like a stretched valuation.
Of course, valuation rarely has been a stumbling block for quality companies in this market — and RingCentral may be no exception.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.