Speculative stocks are too cheap, say potential buyers

Speculative stocks are too cheap, say potential buyers

Stocks continued their 2023 rally on Friday, with modest gains for the S&P500 (SNP INDEX: ^GSPC) and Dow Jones Industrial Average (DJINDEXES: ^DJI) but another strong performance from Nasdaq Compound (NASDAQ INDEX: ^IXIC). Even amid lingering worries about the economy, investors seem to believe the stock market is too cheap to pass up as it gains momentum.

Index Percent Daily Change Daily point change
Dow +0.08% +29
S&P500 +0.25% +10
Nasdaq +0.95% +109

Data source: Yahoo! Finance.
Part of what gives mainstream investors more confidence is that large institutional investors are starting to offer takeover bids for companies they find attractive from a valuation perspective. Indeed, throughout the 2022 bear market, some private and hedge fund investors have been particularly aggressive in buying stocks at bargain prices. Speculation swirled that more companies could be in the crosshairs of mergers and acquisitions, including some well-known stocks that fell sharply.

Clear-headed shareholders seek clarity

The latest example of a stock making huge gains on takeover speculation was Lucid Group (NASDAQ:LCID), which rose 43% on Friday. At one point during the day, Lucid’s stock price gains doubled where it closed at the end of the regular trading session.

The news that moved the stock involved the possibility that Saudi Arabia’s Public Investment Fund might choose to buy the part of Lucid shares that they don’t already have. The Saudi investment vehicle owns a majority stake in the electric vehicle maker, so buying out the remaining minority shareholders wouldn’t be as difficult as it might otherwise be.

Part of the reason for Lucid’s big stock price move could be that the electric vehicle maker has a short-term interest among those betting against the company. According to Yahoo! Finance, 22% of Lucid’s free float was sold short as of January 13, representing nearly 165 million shares. Until today, shorting Lucid stock had been a very profitable move, as the stock fell from above $27 at the start of 2022 to below $7 around the start of this month.

Lucid is one of many electric vehicle companies trying to tap into the huge industry demand, but it is well behind some of its competitors. Despite the supply of fine vehicles, Lucid was unable to ramp up production to meet demand as quickly as shareholders had hoped.

Will the Fed stop private equity?

Lucid is by far not the only title to see takeover speculation. Indeed, several takeovers of battered tech companies have actually taken place in recent months. Earlier this month, an insurance technology company Duck Creek Technologies (NASDAQ: DCT) Have a takeover bid from Vista Equity Partners after the stock fell from nearly $60 per share in February 2021 to just $12 per share last month.

Thoma Bravo made a deal to acquire Coupa Software (NASDAQ: SWAT) in December, sending the stock skyrocketing. The offering price of $81 per share was double the company expense management software specialist’s lows in November 2022, but that was only a tiny fraction of the nearly $350 per share which Coupa reached its peak just two years ago.

Some investors worry that high interest rates will cause private equity firms to scale back acquisition activity due to higher funding costs. However, many such investment vehicles are still teeming with cash, and the prospects of buying companies at low prices today with the intention of going public in a few years, when the bear market might be over for long, look attractive.

Market participants should not expect the Fed’s monetary policy to put an end to M&A activity. As long as private equity sees stocks as cheap, you’ll see big moves like Lucid’s today.

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Dan Caplinger has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

                                                                              <p class="body__disclaimer">The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.