In the news this morning:
Rona Inc. is up about 100% after agreeing to a takeover deal from Lowes. this deal raises a few interesting points:
The stock jumped in a step fashion from the close yesterday at $11.77 to the opening price today at about $23.30. When news like this comes out, as it did, when the market is closed, the price is able to adjust in a step fashion and on one benefits by being the first to hear the news. This is why all major announcements from companies should be made wile markets are closed including during a halt.
The trading action over the past days and weeks shows that there was no leak of this deal as talks progressed. That adds to fairness and the companies and their advisors did the right thing by keeping it totally secret.
A deal like this at a 100% premium illustrates that some stocks are certainly trading below what they would be worth in a takeover. One of Warren Buffett’s key strategies much earlier in his career when he was a smallish investor was to buy shares that were trading far below what they would be worth to a what he called a private owner (which was what they might fetch in a takeover deal).
Rona was in the news in 2012 and I mentioned it in the August 8, 2012 comment when it was rejecting a takeover from Lowes at that time.
Wells Fargo is down 2.5% after announcing it will pay a settlement of $1.2 billion. However, it appears that the hit to earnings will be only $134 million since most of the money had already been set aside in provisions for litigation.
Bank of America is down to $12.86. I have called it Speculative but it does seem cheap. The fear now seems to be bad loans from the energy sector. Banks are always highly leveraged and it is true that bad loans can eat into equity quite quickly. This stock could recover strongly but is not for the faint of heart.