By Antoine Gara
NEW YORK (TheStreet) — The recent tumble in equity, commodity and currency markets has created opportunities to buy stocks in companies that got caught up in the broad selloff.
Firms facing multiple takeover offers have lost their deal premiums, share price gains from the emergence of activist investors have been washed out, and it appears markets have all but forgotten about industries ripe for consolidation.
For instance, an investor can now buy Family Dollar (FDO) stock as if Dollar General (DG) never emerged with a competing all-cash offer for the discount retailer. The offer now stands at $80 a share. In mid-morning trading, shares of Family Dollar were down 0.5% at $76.13.
Only a month ago, investors were pricing in the potential for a bidding war for Family Dollar between Dollar Tree (DLTR) and Dollar General. Now, as oil plunges to four-year lows, bonds tumble to levels not seen since the Fed’s taper tantrum and global currency markets are roiled, it appears investors have forgotten about the deal.
But nothing has changed. The same can be said for a handful of other companies that are benefiting from takeover bids, industry consolidation, corporate breakups or increased input from investors. Those positive trends are likely to outweigh volatility in stock, bond, currency and commodity markets over the long-term.
Here is a list of four stocks to consider amid October’s selloff.
Canadian Pacific, Railroads
In early October, Canadian Pacific (CP) provided an extremely strong long-term outlook to investors, which indicates the company could grow its revenue by about 40% and more than double earnings per share (EPS) by 2018. At the annual meeting, CEO Hunter Harrison also delivered earnings that put the company years’ ahead of goals he laid out when taking the company’s reins in 2012.
A week later, the Wall Street Journal reported that Canadian Pacific has explored a merger with CSX (CSX) , in a deal that would create a transcontinental operator, connecting it with key oil refineries and terminals in the mid-Atlantic and northeast. The potential deal would also triple Canadian Pacific’s revenue and present a new opportunity for CEO Harrison to achieve efficiency gains and rising operating margins.
Nonetheless, October’s market tumult has wiped all stock price gains for Canadian Pacific. Shares in the Pershing Square-backed railroad have lost nearly 10% in the month of October, underperforming the S&P 500.
Other railroads have also lost ground. Union Pacific (UNP) is down over 8% in October, while Norfolk Southern (NSC) is down over 5%. CSX, the rumored target of Canadian Pacific, has shed some its takeover premium in recent days.
Barclays analysts believe consolidation in the railroads is on the horizon. “Apart from the material financial incentives involved in a potential deal, an east-west railroad merger(s) could serve as turning point driving lower cost, increased system capacity and higher returns for shareholders,” they noted in reaction to reports of the Canadian Pacific and CSX deal.
“Such a (proposed) departure from the status quo will always have detractors, but our reading of the ‘enhanced’ railroad merger guidelines in the U.S. points to the potential success for a transaction on the basis of improving service,” they added.
Scott Rostan, a former Merrill Lynch investment banker who worked on Norfolk Southern’s acquisition of Conrail in the mid-1990s said in a telephone interview he believes a transcontinental operator is the ultimate dream for railroad executives. Rostan, who is now CEO of Training The Street, also said consolidation could quickly heat up, as it did in the 1990s when CSX and Norfolk Southern created a bidding war for Conrail.
There are only six railroads that are likely to play in consolidation: Berkshire Hathaway’s BNSF Railways, Union Pacific, Norfolk Southern, CSX, Canadian Pacific and Canadian National (CN) .
Fundamentally, companies like Canadian Pacific continue to show improving earnings. The market is currently giving no credit to a stronger outlook, or the prospect of a once in a generation consolidation wave.
DuPont and Trian Management
Chemical and agricultural giant DuPont (DD) has shed virtually all of its gains since activist hedge fund Trian Management disclosed an over $400 million stake in the company on Sept. 17, and a proposal to have the company split off its disparate businesses, while revamping its capital structure and corporate overhead. The company, while outperforming the S&P 500 in recent weeks, is only up less than 2% for 2014, marginally outperforming the broader index.
Trian believes DuPont should split its businesses into a growth-oriented company consisting of its agriculture, nutrition and industrial bio-sciences businesses, a cyclical business consisting of its performance materials, safety and electronics and communications divisions, and a separation of the company’s performance chemicals divisions.
Alongside a more optimal capital structure and a stronger focus on corporate costs, Trian believes DuPont shares could double. The fund also noted that in recent divestitures such as DuPont’s 2011 sale of its coatings business to a private equity firm, results at the division quickly surged amid cost cuts and the elimination of dis-synergies.
While DuPont shares initially surged on Trian’s investment and its proposal, the company has since lost all those stock gains. DuPont is expected to close the spin of its performance chemicals division in early 2015 and it now has a $5 billion share buyback authorization. Even with those changes complete, investors may benefit from a continued focus on DuPont’s results amid years of underperformance and slowing earnings growth.
In 2014, eBay (EBAY) took on Carl Icahn as a large investor, and the company’s CEO John Donahoe decided in late September to succumb to the activist billionaire’s recommendation that it split its prized PayPal Payments business from its long-established eBay Marketplace e-commerce business.
The market isn’t giving much credit to the dramatic change afoot at eBay. Shares in the company are down for the year and they’ve fallen nearly 10% since eBay unveiled its breakup plan, expected to happen in the second quarter of 2015.
At current prices, both eBay’s Marketplace business and its PayPal business may now be undervalued given their pending split. By some analyst estimates, PayPal may be worth in excess of $30 a share independently, meaning that eBay’s Marketplace division and eBay Enterprise divisions are being given a worth of around $20 billion.
While eBay’s Marketplace business isn’t as highly viewed as competitors like Amazon (AMZN) or Alibaba (BABA) , it does generate significant cash that could be taken positively by investors.eBay Marketplace has earned over $3.3 billion in operating income over the past twelve months, making it one of the most profitable e-commerce businesses in the tech sector.
Most sum-of-the-parts analysis of eBay put the company’s stock value at well over $60 a share, even after the company gave weaker than forecast fourth quarter guidance on Wednesday evening. If shares looked expensive after a surge in late September on eBay’s split announcement, there may now be a buying opportunity.
No Family Dollar Bidding War
Traders no longer appear to be pricing in any increase to Dollar Tree’s offer for Family Dollar. They also aren’t pricing in a likelihood that Dollar General successfully presses a competing bid for Family Dollar.
Dollar Tree has offered Family Dollar shareholders $59.60 in cash and $14.90 equivalent in Dollar Tree shares for a total consideration of $74.50. While Family Dollar shares currently trade at a small premium to that cash and stock offer, they’ve shed any premium attached Dollar General’s emergence as a competing bidder for the company. Dollar General first offered Family Dollar $78.50 in cash and then upgraded that offer to $80 a share, in a deal the company is taking straight to shareholders.
Even if Dollar General doesn’t win out on its offer for Family Dollar, a hostile battle would likely drive shares higher. Meanwhile, analysts believe that the combination of either Family Dollar and Dollar Tree, or Family Dollar and Dollar General should create significant synergies and a discount retail powerhouse that could challenge WalMart (WMT) .
A market sell-off has wiped out much of the enthusiasm surrounding Family Dollar’s takeover. Perhaps, there are still more twists and turns in this dollar store merger, creating upside.