With the economy showing signs of recovery and with stocks rising, increased optimism seems to be setting off a wave of takeover deals. In just the past several days, a merger deal between Office Max (OMX) and Office Depot (ODP) has been announced. Kinder Morgan Energy (KMP) has agreed to buy Copano Energy (CPNO) for about $3.22 billion. Linn Energy (LINE) offered to acquire Berry Petroleum (BRY) for about $2.5 billion, and this is just some of the recent merger and acquisition activity.
Very low interest rates make it cheap to finance deals and it also motivates cash-rich corporations to put those funds to work since it generates so little when sitting in bank accounts. That is why the environment is ideal for more buyouts in the coming months, especially as confidence builds that the worst has probably passed for the economy. The wave of recent takeovers could accelerate more deals as it motivates companies to get off the sidelines and buy before asset values rise or before another company acts first to buy a potential takeover target.
In early February, I wrote about a few stocks that were cheap and trading below $8 that could be takeover targets. Just a few days after the article came out, one of the picks, "Artio Global Investors" (ART) announced it would be acquired by Aberdeen Asset Management. This caused Artio shares to surge from just below $2 to about $2.75 per share. That's a gain of roughly 40% in a very short time and this kind of reward is why investors should consider quality companies that also could be takeover targets. I believe it makes sense to focus on small capitalization and low-priced stocks because these often go "under the radar" of many analysts and investors. Because of this, when deals are announced, some larger than average gains can result when a deal is announced. With this in mind, here are some top picks of stocks that appear undervalued now, but also have takeover potential in the near term. Thanks to a 216 point decline in the Dow Index recently, some of these stocks have seen a pullback, and that creates an ideal buying opportunity for both a short-term rebound as well as mid to long-term upside:
Denison Mines Corp. (DNN) is a uranium exploration and development company with high-potential projects in Canada, Zambia, and Mongolia. Of particular interest is its 22.5% ownership interest in the McClean Lake uranium mill, and the Wheeler River project which is in the uranium-rich Athabasca Basin region of Saskatchewan, Canada.
Uranium is used for nuclear power and when Japan suffered major problems in the aftermath of the Tsunami in 2011, the nuclear industry saw increased concerns over the safety of this leading power source. Uranium prices took a hit after the 2008 financial crisis and were starting to regain an upward trend until this natural disaster sparked new concerns about the industry and even caused calls for nuclear plants to be shut down in countries like Germany. The crisis in Japan caused that country to stop buying uranium and even sell some existing stockpiles, which further depressed the price of uranium. However, nuclear energy is likely to remain as a leading power source, especially as emerging market countries like China and India seek ways to generate power for their fast-growing population.
In all likelihood, demand for uranium and nuclear power is likely to increase, and as time passes, investor concerns about the future of this industry are probably going to fade and turn towards focusing on the rebound potential for uranium. Some analysts expect uranium prices to rise and average $70 per pound in 2013, and jump even further to about $85 (on average) for 2014. That would be a huge gain from current levels of just around $42 per pound and there are a number of catalysts that could push it to much higher levels in the coming year.
Nuclear power is far cheaper than oil or even natural gas and coal and that will drive future demand, especially as many governments look for ways to save money. Here are a few catalysts that could cause uranium stocks to rise in 2013: Japan's newly elected Prime Minister, Shinzo Abe seems ready to reverse course and build new nuclear reactors. China could be poised to build about 85 new reactors in the next 20 years, which would be a 600% increase from the 15 nuclear plants it has now. Another factor that could support much higher uranium prices is the supply picture. In the coming months, a program that generated low-enriched-uranium for nuclear fuel from dismantled Russian warheads could come to an end, thereby significantly reducing the supply of uranium. These factors could positively impact uranium and drive investor demand for stocks like Denison.
Denison is an ideal way to play the rebound in uranium. It appears dirt-cheap at just around $1.27 per share and it even has strong takeover potential according to some industry watchers. Analysts at Raymond James recently upgraded Denison shares from market perform to outperform. Raymond James also said the company has "high" takeover potential thanks to what it calls "world-class" uranium deposits at its Wheeler River project. It appears that Cameco (CCJ), which has been highly acquisitive in the past, could be a possible suitor for Denison. Cameco is one of the world's largest uranium producers and it has projects that are close to Denison's in the Athabasca region.
Since Denison has nearly $41 million in cash and almost no debt, it is easier to acquire as it has a strong balance sheet. This solid financial position also reduces risks for investors. The risks appear limited at current levels because of the strong financials and also because the main assets are located in a politically stable country, (Canada). Of course, another major nuclear incident could cause uranium prices to drop and impact companies like Denison, but since those incidents may only happen very rarely, the risk seems very minimal. Especially since nuclear safety inspections and programs have been stepped-up since the Japanese Tsunami.
Denison shares regularly traded for more than $8, before the financial crisis and the Tsunami in Japan. Back then, oil was trading for over $100, and that helped fuel demand for higher uranium prices. With all the potential problems that could flare up in the Middle East, and with central banks printing money, it may not be long before we see oil and uranium prices surging again. That environment could turn Denison shares into a multi-bagger, if a takeover does not happen sooner. Out of all these stocks, I believe Denison has the most potential in the short-term to rise, and I believe it is the most likely pick to be acquired next.
Here are some key points for DNN:
Current share price: $1.27
The 52-week range is $1.03 to $2.05
Earnings estimates for 2013: around break-even results
Annual dividend: None
Alcatel-Lucent (ALU) has a variety of communication and technology services and products that it offers to customers globally. This company is based in Europe, but it has a strong presence in the United States and other parts of the world. This is a major company with annual revenues of about $18.7 billion. However, it has faced a
number of challenges in the past few years and it is trying to turn the situation around.
Alcatel-Lucent recently appointed Michel Combes to take over as CEO. Mr. Combes formerly held positions at Vodafone (VOD) and France Telecom (FTE) and he will now oversee a turnaround plan which includes a 7% employee head count reduction by the end of 2013. That should help boost the bottom line and help Mr. Combes work towards the stated goal of "lasting profitability."
This company has a solid balance sheet with about $6.38 billion in cash and around $6.23 billion in debt. The plans to reduce expenses through job cuts combined with some positive economic signs coming from the U.S. and China could greatly improve the outlook for profits. It could also make this company an attractive takeover target, especially towards the end of the year when the job cuts are expected to be completed. The primary risks for investors in this company could be dependent on management execution and also whether or not the economic problems get worse in Europe.
Some investors and analysts have considered Alcatel-Lucent to be a takeover target due to the many valuable patents it holds, and because of the depressed stock value, which once traded for many multiples of the current price. One recent article makes a case for a takeover with Cisco (CSCO) as a possible suitor. That does seem to have merit, however, buyers might wait until after more progress is made in the turnaround plan. That means this stock is worth considering on pullbacks, but it might be awhile before a deal (if any) arises.
Here are some key points for ALU:
Current share price: $1.36
The 52-week range is 91 cents to $2.60
Earnings estimates for 2013: a loss of 13 cents per share
Annual dividend: None
Molycorp, Inc. (MCP) was once a darling of Wall Street and it even became a "momentum" stock that seemed to have huge potential. A couple of years ago many investors bought into a frenzy over rare earths, which are used in a variety of technology and other products that range from televisions, mobile phones, magnets, lighting, catalytic converters for cars, and more. However, in hindsight, the stock price and story surrounding the rare earth industry seemed to have gotten way ahead of the fundamentals.
Molycorp is one of the world's largest rare earth producers and it is based in Mountain Pass, California. Rare earth minerals are not abundant in many parts of the world but China has high levels and so does Molycorp's "Project Phoenix" in California. This puts Molycorp in a unique position of controlling strategically important resources. However, the stock has disappointed many investors as sustainable profits have been elusive. The shares now trade at just over $6, which is well below the 52-week high of roughly $35.
Analysts expect Molycorp to lose about 26 cents per share for 2012, and around 55 cents in 2013. The losses have required the company to raise capital and it recently offered about 37,500,000 shares at $6 each in January 2013. That helps to strengthen the balance sheet and keep the strategic plans and production going.
Some investors and analysts think the stock is way too cheap and that the company could even be a takeover target. A recent article states that a major manufacturing company might be a likely suitor and offer to buy Molycorp in order to secure the strategically important supply of rare earths that are used in a multitude of products. With a current market capitalization of just over $900 million, Molycorp would be an affordable acquisition for a number of major corporations. However, with losses expected to continue, investors need to balance the risk that continue in the event that no takeover offer arises in the future. If the company fails to produce profits in the future, it may need to raise additional capital and this is another risk factor to consider. Because of this, I would probably keep any positions in this stock to just a very small amount of a portfolio with the idea that it is a higher risk and potentially higher reward investment.
Here are some key points for MCP:
Current share price: $6.24
The 52-week range is $5.75 to $35.79
Earnings estimates for 2013: a loss of 55 cents per share
Annual dividend: None
Nokia (NOK) shares used to be high-flying but the competitive pressures in the smartphone market that have come from Apple (AAPL) with the iPhone and Google's (GOOG) Android phones have sent the stock down to just below $4. It remains to be seen how things will play out for this company in the future, but for a number of reasons it appears to be way too early to completely write off this stock.
Nokia is trying to turn the current situation around with new products like the Lumia 920, which features Microsoft's (MSFT) latest Windows 8 operating system. The relationship Microsoft has with Nokia is interesting and some investors and analysts believe it could turn into much more someday. One recent article details why some believe that Microsoft needs Nokia more than Nokia needs Microsoft. This is one reason why the relationship could eventually lead to a buyout. Microsoft certainly has the financial resources to buy Nokia since it has about $68 billion in cash and just around $14.2 billion in debt. Nokia has a current market capitalization of about $14 billion and a strong balance sheet with $13.43 billion in cash and $7.18 billion in debt. Microsoft could use just a small part of its cash horde to buy Nokia and it would still have over $50 billion in cash left.
Tech companies have been known to buy smartphone makers in the past (with mixed results). For example, Hewlett Packard (HPQ) bought Palm, and Google bought Motorola Mobility in order to offer the Android phone and operating system. This may lead Microsoft to consider buying Nokia because without a deal, Nokia could decide to also focus on Android phones and that might leave Microsoft with fewer options to pursue the smart phone market. Analysts and investors have considered Microsoft as a possible suitor for Nokia in the past and other companies are also looking at acquisition options.
China's Lenovo recently said it is considering a deal for a smartphone maker. This could mean that Microsoft might have competition if it is interested in buying Nokia. Since Nokia has a solid balance sheet and a cheap valuation, the stock could have major rebound potential in a turnaround or buyout scenario. Let's not forget that BlackBerry (BBRY) shares just about tripled in value from recent lows, and that shows how quickly a stock like Nokia could possibly double in value from currently depressed levels. The risks for Nokia investors is if the company never produces a full-fledged turnaround or a buyout offer. In this case, the shares could stagnate or slowly decline, but it appears that the company has time to execute the more positive options before this becomes an increased risk.
Here are some key points for NOK:
Current share price: $3.72
The 52-week range is $1.63 to $5.57
Earnings estimates for 2013: a profit of 7 cents per share
Annual dividend: None
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.