| Newsletter - Archive |
TAKEOVER TARGETS ON WALL STREET!While the Internet mania of late '98 eclipsed this column's traditional focus on financial stocks, some of our most spectacular winner stocks in 1998 were US banks, Wall Street brokerage houses and insurance companies. Last October's strategic recommendations to buy Chase Manhattan at 37, Merrill Lynch at 40, Morgan Stanley at 46 and Lehman Brothers at 28 have all proved fabulously profitable in the last five months. Chase is now 81, Morgan Stanley is 96, Merrill is 82 and Lehman is 57. In other words, all four Wall Street financial blue chips have doubled in value since they were recommended in this column a mere five months ago! Financial stocks appear undervalued in this stage of the bull market. The bond market sell off is a classic false alarm. A 5.7% yield on the long T-bond is unsustainable as the world financial system is still fragile, inflation is non-existent and the recent spurt in US growth was an aberration, an offshoot of the GM strike and a few year end mega orders for Boeing. But Wall Street, as usual, has overreacted to Dr. Greenspan's Delphic comments on monetary policy. Sure, 4Q 98 economic growth was strong at 5.6% GDP but that was only due to a seasonal spurt in exports, auto and housing. But the higher dollar will dampen export growth, auto sales have already peaked and higher mortgage rates have already resulted in lower home purchase applications, a leading indicator of weaker housing starts. Note that strong productivity growth, a $100 billion Uncle Sam budget surplus, $10 crude oil, $288 gold and 25 year lows on the CRB commodities index do not exactly portend an inflation crisis ahead. Besides, the Brazilian real has plunged to 2.15 dollars again, Euroland is on the eve of lower ECB rates and the Bank of Japan is pumping yen by the trillion into the Tokyo money market to avoid a deflation death spiral. Why else is the yen at 122 and JGB rates back down to 1.75%, levels last seen in mid-January? The yen is headed in one direction: south to 135 - 138 by the autumn. All this ipso facto, is strongly bullish for the dollar and US Treasury debt. Interest rates in the US are going to go lower, despite the steeper yield curve and the current bearish sentiment on Chicago IMM Eurodollar futures. Calm down, Mr. Market. The Fed will not hike rates because the fabled bond market vigilantes have already done the dirty work for Dr. Greenspan. In the 1990's, the most powerful weapon of monetary policy is the exaggerated inflation-phobia of the Chicago T-bond futures pits! Volatility in interest rates thus dampens volatility in US economic growth in this New Age of Goldilocks. All this suggests that financial stocks could once again regain the sector leadership they lost in the summer of '98, when Russia went belly up and LTCM's "rocket scientists" were vaporized by their leveraged bets on "market neutral "arbitrage. I believe that interest rates will plunge again in the US as the economy slows, Japan reflates, the dollar surges against the yen and the Euro, Brazil sinks into depression and the long T-bond yield falls to 5%. The most spectacular winners of '99 could well be financial stocks ripe for a take over bid because the Darwinian shakeout in global finance is not at all over, only interrupted by the capital markets hurricanes of last summer. J.P. MORGAN Take J.P. Morgan (JPM), for instance. Morgan, despite its global cachet as the classiest money center bank on Wall Street, has been a lousy performer for shareholders. It has trailed the SP 500, the various bank indices and at 108, is well below its high of 148 last April. Book value is $70 a share and the market cap is only $19 billion, a mere five per cent of Microsoft and one fourth of AOL. But Morgan is not a Mickey Mouse bank. Its boasts $260 billion in assets, has impeccable connections with the world's richest governments and corporates, half its earnings come from high growth fee businesses like merger advisory, asset management and corporate finance. Yet earnings will be $8.75 in 1999, so Morgan trades at a mere 1.6 X book value and 12 times current year earnings. This is an irresistible trophy franchise for, say, Chase Manhattan Bank. Besides the activist institutional shareholders who targeted under performing bank CEO's and forced "friendly" high profile mergers have now set aim at Morgan mergers. Remember Chemical Bank, Manny Hanny and Security Pacific? This column had last successfully pinpointed two takeover targets back in 1997 - Britain's Mercury Asset Management (MAM) and Salomon Brothers. Could J.P. Morgan be our winner takeover bank in '99? I think so. Morgan could well be taken out at three times book value or $200 a share. If my macro view of lower interest rates is correct, downside risk is no more than 10 while the upside potential is 90 points. I would take 9-1 odds in my favour in Monte Carlo or Ascot if they ever existed in a second, so J.P. Morgan is a steal at 106-108. LINCOLN INSURANCE The insurance sector is 10 years behind banking in its M&A potential. Aegon's $10.8 billion bid for Transamerica or the $18 billion AlG - Sun America deal is the tip of the iceberg for a takeover wave that will offer fabulous money making opportunity in insurance stocks. Every macro investment theme I watch has flashed a buy strong signal on insurance stocks. Between now and 2010, 40 millions American Bay Boomers will retire, a hugely positive anchor for the sales of annuities and wealth management products like mutual funds. Why else did AIG pay a rich six times book value for Sun? Economies of scale are huge in global insurance, definitely in the life sector. Besides, Congress has made it easier for banks to acquire insurers and vice versa, as the Sandy Weill - John Reed marriage last April proved. So who are cheap life insurance businesses that would be irresistible to a US super regional bank or European financial conglomerate? Take Lincoln National (LNC). It trades at a mere 15 times current P/E and two times book. It has $133 billion under management and owns one of Americas top ten life, annuity, reinsurance and mutual fund businesses. Lincoln's multi-channel distribution network is also unique - banks, Internet, independent agents, in house brokers etc. Lincoln boasts a valuable national brand and, after the AlG - Sun and Aegon - Transamerica deal, is sure to incorporate a takeover premium. Its new CEO John Boscia has not ruled out a merger as a way to unlock shareholder value. Lincoln, like Morgan, was a lousy performer in 1998, up only 4% while the life insurance stock index was up 25%. If the price is right, Boscia will sell and there will be no shortage of bidders for Lincoln among the world's life insurance elite. It is only a matter of time. Meanwhile, the CEO is restructuring the business and Lincoln uses the Internet to target its marketing, communicate with its clients and boost profit per online accounts. Its huge bond portfolio will surge when interest rates fall, as they will this summer. A takeover bid for Lincoln could well be four times book value, still much below what AlG paid for Sun. That means a 160 price target. With Lincoln now at 94, the risk reward here is as wonderful as the Morgan Bank. MATEIN KHALID The opinions expressed by the writer are his own and not endorsed by Press Release Network.
| |||
|
