At this phase in the stock market cycle, valuations may deter bigger firms from pursuing a mergers & acquisitions plan. Stock markets are trading so close to all-time highs that the buyer will need to raise debt or sell shares. Only then might it buyout a weaker firm that complements its business, which deems a handful of companies as buyout stocks.
So, as long as a takeover target fits a company’s long-term growth strategy, investors will have buyout stocks to speculate on. That said, these seven companies may go up if a takeover happens. They are:
- Dropbox (NASDAQ:DBX)
- Rite Aid (NYSE:RAD)
- ViacomCBS (NASDAQ:VIAC)
- Etsy (NASDAQ:ETSY)
- II-VI Incorporated (NASDAQ:IIVI)
- Yelp (NYSE:YELP)
- Peloton (NASDAQ:PTON)
Now, let’s dive in and take a closer look at each one of these buyout stocks.
Buyout Stocks: Dropbox (DBX)
Since its IPO, Dropbox failed to reward its investors. In fact, Dropbox stock peaked in the $23.50 range after failing to break above the “multiple tops” (a resistance level for the stock) between June and August.
Overall, the file-sharing service firm has a fundamental contradiction in its business model. Consumers may use Dropbox’s file-storing services for free. They will then advocate its benefits to their employers, and if companies buy Dropbox’s services, then revenues will grow.
More often than not, though, corporations use Google Drive or Microsoft (NASDAQ:MSFT) OneDrive. Companies that support Apple (NASDAQ:AAPL) will use iCloud or OneDrive instead. Dropbox countered those offerings by adding HelloSign to support e-signing documents. It added collaboration features so that small businesses may continue subscribing.
Therefore, since Dropbox stock is trending lower, Google or Microsoft might buy it. Shares could fetch almost $30 for starters according to this model.
Rite Aid (RAD)
In the pharmaceutical retail space, Rite Aid is ripe for a takeover as one of the buyout stocks. And CVS Health (NYSE:CVS) or Walgreens Boots Alliance (NASDAQ:WBA) are potential buyers. In September, Rite Aid stock crashed from a $14 high to below $10.
Additionally, Rite Aid posted second-quarter revenue growth of 11.5%. However, it still lost $13.2 million, or 25 cents a share. But, this is still better than the $65.5 million loss from last year. CEO Heyward Donigan said about the quarter:
“Our retail pharmacists and associates have always been deeply committed to our communities, and they are doing a great job protecting our customers during a global pandemic. Thanks to them, Rite Aid continues to gain retail market share and increase both same store prescription count and front-end sales.”
Moreover, Rite Aid forecast fiscal 2021 revenue in the range of $23.5 billion to $24 billion. It expects to lose between $190 million and $140 million, or an EPS loss of up to 67 cents. If CVS or Walgreens acquires it, Rite Aid would get the additional capital needed to improve its efficiency. The new owner could also slash costs by shutting down stores.
Still, Rite Aid is better off keeping all of its stores open and growing in scale. It recently acquired Bartell Drugs for $95 million. and on Wall Street, only one analyst offered a price target of $9 .
However, if Rite Aid was bought out, it would sell for higher than that.
Buyout Stocks: ViacomCBS (VIAC)
In the entertainment space, ViacomCBS has a valuable library of content. That said, a company like Disney (NYSE:DIS) or Apple could buy the firm for around $20 billion, excluding any premium.
ViacomCBS stock pays a 96 cent dividend annually, or around $500 million a year, to shareholders. So, the buyer could eliminate the dividend and integrate the company’s streaming services under its brand. On Oct. 20, ViacomCBS promoted Tom Ryan to President and CEO of the company’s streaming unit. That said, the announcement signals the company’s seriousness in wanting the Paramount+ launch in 2021 to succeed. Pluto TV is also critical in growing viewership.
Collectively, Ryan will have the responsibility of accelerating the growth of the company’s free and paid streaming services. He must also establish Pluto TV as the number one-ranked ad-supported streaming TV service in the U.S. and globally.
The 14 analysts who cover VIAC stock have an average price target of $30.92.
The high scores on quality, growth, and value also suggest that ViacomCBS is on sale and ready for a buyer to bid a higher price.
Up more than 200% year-to-date, Etsy’s moat in the internet retail space should attract an acquirer. Plus, it posted strong second-quarter results in August. In the second quarter, Etsy posted revenue growing 136.7% to $428.74 million, and gross merchandise sales topped $2.68 billion.
Etsy has a simple mission statement: “Keep Commerce Human.” By matching buyers with sellers seemingly effortlessly, Etsy created a thriving marketplace. And new buyers continue to join the site.
In the last quarter, the Etsy marketplace added 18.7 new buyers and reactivated buyers. This includes customers who did not buy anything in one year or more. Once the site draws the buyer, the chances of a second purchase increase. And Etsy’s powerful network and newly-launched thriving Offsite Ads will only boost revenue.
Buyout Stocks: II-VI Incorporated (IIVI)
II-VI, which makes engineered materials and optoelectronic components, is enjoying strong growth. In its fourth quarter, the company posted revenue growing 105.7% YOY to $746.2 million. It also earned $1.18 per share on a non-GAAP basis.
Company CEO and Principal Operating Officer Dr. Vincent Mattera said that it benefited from strong 3D-Sensing and communications market strength. He also said that “the digital transformation continues, led by the continued growth of 5G deployment and network infrastructure upgrades.”
Additionally, II-VI forecasts the Q1 revenue for FY2021 of up to $750 million. And non-GAAP EPS will be in the range of 45 cents to 60 cents.
According to simplywall.st, IIVI stock is worth about $78, based on future cash flow expectations. A peer like Lumentum (NASDAQ:LITE) has a similar market capitalization and could bid for II-VI. Coherent (NASDAQ:COHR) is in the same industry, but would need to leverage its balance sheet to buy II-VI.
Yelp is nowhere near the pre-Covid-19 highs of more than $35. The company depends too much on the advertising industry for its revenue. And at these discounted levels, Google could buy the firm. Even a giant advertising firm like Omnicom (NYSE:OMC) might express interest.
In the second quarter, Yelp posted a net loss of $24 million. Also, net revenue of $169 million is down 32% from last year. The firm is suffering from the Covid-19 pandemic as restaurant businesses are suffering greatly with customers staying at home when they can and working from home. With web traffic hurting because the demand for reading reviews falls, Yelp will under-perform. That said, an advertising firm that has plenty of cash on hand could take Yelp private — integrating its platform into its operations.
Overall, Yelp could ride the storm and wait for businesses to reopen. It experienced a steady improvement in web traffic and advertising budgets in June. But the persistently growing infection rates will threaten Yelp’s recovery, making it an option as one of the buyout stocks.
Buyout Stocks: Peloton (PTON)
After trending near all-time highs, Peloton is not one of the cheap buyout stocks. A buyer may balk at its current valuation. Still, a steep market correction could send Peloton shares lower. Speculators may wait until the drop before buying shares and betting on a buyout.
Amazon indirectly entered the exercise bike market with Echelon. Unfortunately, history is not on the retailer’s side. The company did not create a fitness device when Fitbit became popular. Still, once it works with Echelon to clarify this in communications, the inexpensive fitness bike could take some of Peloton’s market share. That said, Amazon may fare better buying Peloton outright and integrating the online classes with its own Amazon Prime offering.
If at-home exercising continues to grow in popularity, Amazon would lose a chance to grow in this category. One may assume streaming video customers may change their habits. If they switch from watching Prime videos and exercising, it would justify acquiring Peloton.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.