Bull Case Possibilities

I mentioned in my previous article, The Bull Case that many companies had strong free cash flow and were trading at reasonable prices. The question is how does that translate into actual gains for the market. Obviously a lot of buybacks and takeovers would help but some nice blockbuster deals would speed things up. The following blockbuster deals could help stabilize markets beyond just a relief rally. These are not predictions, just possibilities:
  • Nestle is receiving $25 billion in cash from its sale of Alcon to Novartis. They have already stated that they are looking to do a large acquisition. A blockbuster acquisition of a US company would give a much needed cash injection to the stock market.
  • Google has $90 a share in cash or $28 billion. Ex-cash their stock trades at about 12 times. A share buyback makes sense, following their search brethren Yahoo who announced a $3 billion share repurchase yesterday. 
  • Steve Jobs has made fun of companies that repurchase stock so a share repurchase is unlikely. However, it does not make sense to hold over $25 billion in cash. A one time dividend or large acquisition might be more likely.
  • A lot of the large European health care companies have huge piles of cash. They have been very slow in spending it but some US biotech companies are trading at very reasonable levels. An acquisition of a company like Gilead is a possibility now that the stock has fallen so far. More likely someone will take over Biogen or Genzyme which are already dressed up for the dance.


Onlooker said...

This bit about large companies having mega cash on hand is all the rage amongst the perma bulls on CNBC, etc. That and earnings.

But somebody correct me if I'm wrong here, but it seems to me that I read that this was also a bull talking point during the '30-'32 bear and we see how that worked out.

I'm going to have to go do some research on that to verify or refute it. I think I remember seeing it on the News from 1930 blog last year when I was reading quite a bit of it.

Tsachy Mishal said...

The guys on CNBC only look at cash without looking at the other side of the balance sheet or at valuation. Bear Stearns had tons of cash at the start of 2008 but more liabilities.

I am talking about the high quality companies that Hussman recommends. Like a WMT, PG, JNJ, PFE or tech companies like GOOG and MSFT.

Onlooker said...

Understood. And I think that a strategy of being long these quality companies with healthy balance sheets and short the market would work nicely until we get a true secular bear market bottom. That's essentially Hussman's strategy and I have a good slug of money in his care.

I was referring to the premise that this would bolster the bull market thesis on a wider basis. And I think that is a specious argument in this deflationary environment. If nothing else other than P/E and other valuation multiples coming down to market bottom type numbers.

Of course that's anathema to the perma bulls who think nothing of paying high multiples for the market as they have been desensitized by the market of the last 10+ years.

Tsachy Mishal said...

If these mega caps start put putting some cash to work and get the market going the herd would likely follow. I am not predicting this will happen but just saying that its a plausible way that a sustainable rally could start.

I always try to see the other side of the coin when everybody seems to be on one side. I too think the more likely outcome is a softening of the economy and markets.