This weekend’s marriage announcement between Sprint and T-Mobile shows that the proverbial dealmaking “animal spirits” are alive and kicking on Wall Street.
Late last year, I called “M&A” — mergers and acquisitions — one of the stock market’s best bets for 2018.
As far as I’m concerned, that’s still the case for smart investors.
According to Ernst & Young’s Global Capital Confidence Barometer, nearly three quarters of U.S.-based corporate executives think merger activity will heat up even further (compared to just 25% having that opinion in the same survey six months ago).
It’s easy to see why.
Deals to Be Done
One, corporate tax reform removed a major impediment to dealmaking for Wall Street’s “masters of the universe” — investment bankers and empire-building CEOs.
Two, the stock market so far remains strong despite a myriad of worries, from interest rates to trade tensions, profit growth and the economy’s outlook.
Three, there are plenty of big, cash-rich companies whose stocks are getting punished for that most heinous of Wall Street crimes: slowing earnings growth. Big companies know that if they can’t create faster growth from their own operations, they’ll go out and buy it instead.
For those kinds of reasons, the first quarter marked the best ever start for global M&A, with more than $1.2 trillion in deals for the period, according to Thomson Reuters.
And investment banking firms like Goldman Sachs think it will continue. The firm, citing a myriad of statistics, thinks 2018 is “on track to be one of the most active years for large M&A in recent history.”
How to Profit
In mid-December, I suggested the IQ Merger Arbitrage ETF (NYSE: MNA) as one possible way to play the M&A trend for 2018.
(Source: TradingView.com)
As you can see from the chart, the exchange-traded fund performed a “round-trip” since late last year — up nearly 3% through late January, then down by almost the same amount afterward. From a price perspective, it’s basically unchanged from the point I recommended it in December.
I see it as the “pause that refreshes,” with a bigger rise to come as we move through the rest of the year.
Companies know the clock is ticking. The window to get big deals negotiated, financed and announced to investors won’t be open forever.
That’s why we should expect even bigger announcements than the T-Mobile/Sprint hookup in the months to come — and why the IQ Merger Arbitrage ETF should move higher still.
Kind regards,
Jeff L. Yastine
Editor, Total Wealth Insider