Frank Curzio's WALL STREET UNPLUGGED Podcast

How to capture the biggest gains from a company takeover

IBM has been a whipping boy for the mainstream media for several years… But regular listeners know I’ve been bullish on it for months now. Today I break down its recent quarter… and explain how this incredible company has morphed into a growth stock.

It’s one of the best feelings in investing—when one of your portfolio companies is bought out by a competitor at a premium. If you owned shares of Anadarko Petroleum, you made 37% overnight as Chevron announced a takeover. Here’s how I decide when to sell after a takeover is announced… and what to think about in order to capture the biggest gains possible.

I’m truly humbled by the feedback and support I receive from all of you. You’re like family to me… and I’ve got some amazing personal news to share with you today.

I hope you all have a great Easter weekend.

Transcript

Frankly Speaking | 56

How to capture the biggest gains from a company takeover

Announcer: 00:02 Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media, to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on Main Street.

Frank Curzio: 00:16 What’s going on out there? It’s Friday, April 19th. I’m Frank Curzio host of the Frankly Speaking podcast where I answer all your questions on [inaudible 00:00:23] sports … anything else you wanna throw at me.

Frank Curzio: 00:28 I create this podcast answer more of your questions that you send me to my Wall Street Unplugged podcast which I host every Wednesday.

Frank Curzio: 00:35 If you want any questions answered, just send me an email at Frank@CurzioResearch.com, that’s Frank@CurzioResearch.com, be sure to put Frankly Speaking in the headline and you never know. Your question may be the one I read on this podcast.

Frank Curzio: 00:47 Lots of questions coming in during earning season so let’s start with one from Danny.

Frank Curzio: 00:52 “Say Frank, what are your thoughts on IBM after the quarter. I’m up a lot on this thing thanks to you, but it is time to take the profits.”

Frank Curzio: 00:59 Well IBM reported earnings this week and they were pretty good; they were very good. I thought it was mostly positive. And the stock fell I think around three, four percent. I was getting some emails say “Frank, are you worried about IBM?”

Frank Curzio: 01:13 Look, I covered a segment in Wednesday’s podcast talking about how to play companies or how to almost bet on companies into earnings season. You have to look at sediment if they are rising up into the quarter, or if the stock is coming down into the quarter. IBM is the number one performer in the DOW. It’s up well over 30 percent since January. Do very very well and outperforming the SP 500. So the numbers coming in the way they did, which are pretty solid. You gonna see a pullback no matter what. And I would use this pullback to really buy the name if you haven’t. Wherein earlier probably up I’d a guess over 15 percent maybe 20 percent of this position were very early to it when everybody hated this company. I think it’s starting to come around now. It is, just listen to the results. I mean you look at the quarter, gross margins expanded which is key to the story. Forget about revenue instead of saying “Revenue declined three consecutive quarters.” Guys you have to understand that’s not a big deal.

Frank Curzio: 02:13 Hear me out first.

Frank Curzio: 02:14 You talk about a company, if you have a company that, where it creates nine and a half million dollars to manufacture something that you sell for ten million dollars. Your revenues are going to be ten million dollars, but your margins are going to be small. However, if you create something for half that price, you’re looking at the numbers, say if it’s five million dollars and the cost … you’re selling it for five million and the cost to produce that product is two or three million. What would you rather do when it comes to margins? Would you rather have 23, 30, 40 percent margins, even more? Or very tight margins and your revenue go higher cause that’s what the company’s doing right now. They’re switching to a services model, cloud, AI, you’re looking at big data analytics and they’re killing it right now. It took a while, it did take a while, I mean you look at IBM, you look at over the years and Buffett coming in at 200 and selling it at one whatever, losing and bashing it and all these companies bashing IBM the whole time. But when you really look at the numbers and where it is, it’s kinda incredible with this company and where they were and where they are now is just, when I look at it, it is, it’s just incredible.

Frank Curzio: 03:21 So when I’m looking at these numbers, just gonna throw some things out there guys, the margin expanding again cause these sales are regenerating from service segments like cloud and epic data, also blockchain, margin expected to go higher going forward. The back log of business stands at 111 billion dollars. 111 billion dollars. I mean that’s incredible for a company whose market cap is 125 billion. You looking at its competitors and they’re clearly the number three in cloud right now behind Amazon, AWS, and Microsoft Azure.

Frank Curzio: 03:55 So those company have 800-billion-dollar market caps, so you look at IBM could double pretty easily and it’s still not gonna … it’s gonna be a blip on the radar to these guys. That’s how depressed it’s been.

Frank Curzio: 04:09 But 111 billion dollars in back log’s pretty good. Expecting to generate 12 billion dollars in free cash flow this year. They said they’re gonna generate at least $13.90 in earnings which I think is super conservative. They’re paying a four and half percent yield, which is easily covered by earnings and cash flow, this isn’t a yield like “Whoa, the stocks depressed. Are they going to cut it?” No, no not at all. Not at all.

Frank Curzio: 04:37 I mean you look at the earnings, what it takes for … to pay that dividend is $6.28. They’re expecting to generate $13.90 in earnings this year, easily cover, that dividend’s perfectly safe. So if you think IBM’s just … hey, they’re growing, they’re doing okay, they’re gonna grow into the future. This is a great place to put your money, almost park your money. Where you can earn a significant yield that is safe.

Frank Curzio: 05:03 But aside from the numbers that they reported, which I thought was very positive. Forget about them for a minute. Because this story is about Red Hat, which they’re in the middle of acquiring 34 billion dollars. We throw out billions and then we talk about debt, we talk about trillions. Let me explain you something about 34 billion, it’s one of the biggest tech deals ever. I looked this up, it ranks third behind Dell EMC and AVGO Broadcom. One of the biggest. And I’m not sure if you saw Red Hat’s numbers, they were reported about three weeks ago. And the reason why I’m saying that is it’s under the radar because even if they report great earnings or if they report weak earnings, they have a bid on the table so you’re not going to see the stock move that much cause it’s trading close to the price that IBM’s gonna purchase them at or acquire them at. So it’s kind of under the radar, no one’s really mentioning it, “Ah, big deal, it doesn’t matter what they report because IBM’s buying them, whatever.” It does matter. Cause when you look at those numbers which I have to do since I’m recommending IBM to my subscribers, you really have to look under the hood there.

Frank Curzio: 06:05 And the reported earnings of a $1.16 per share, that’s 15 percent better than the estimates, the consensus estimates. Sales rose 14 percent, sales right now for the average company SP 500 are growing less than five percent. Sales grew 14 percent. Its back log increased to over 4 billion, up 22 percent from last year. Third year in a row where back log increased at a rate of more than 20 percent year over year. What does that mean? It means people are buying their products and they love it. And they’re telling their friends about it and they keep adding more and more business. This isn’t a one year thing, we came out with this product, it’s gonna be pretty good. No. It continues to accelerate.

Frank Curzio: 06:46 Total number of customers with active subscriptions that are greater than five million dollars increased 33 percent year over year. Again, this is all Red Hat.

Frank Curzio: 06:56 Cloud and services growing tremendously, earnings growing at an incredible 25 percent year over year. The average earnings right now are declining year over year cause tax reforms of last year for SP 500 companies. It’s acquiring around one and a half percent. It’s supposed to acquire four percent and we’re still pretty early in earning season, next week’s gonna get nuts. And the following two weeks are gonna be really crazy.

Frank Curzio: 07:20 But 25 percent earnings growth? Are you looking at Red Hat and IBM, companies that worked together in the past, companies that have similar cultures actually. It’s a perfect match and I put it right up there with Disney buying Marvel, eBay buying PayPal, Facebook buying Instagram, that’s how great this is. IBM is doing good on their own, by purchasing Red Hat, it’s a game changer. I mean it’s gonna make them the number one player in hybrid cloud which is private and also public, which is a trillion dollar opportunity. A trillion dollar opportunity. And IBM is gonna be the biggest player in this market. Again, with a very small market cap compared to its competitors who have other things going on with Microsoft and Amazon as you know, but IBM, the transition is done. They’re here, they’re successful. It’s only gonna get better and better and better from here. It’s still at the bottom, people are like “Wow you know what, it is working, wow they’re doing good to cloud and services, blockchain, yeah they’re getting to AI, wow they’re starting to see revenues increase.” It’s here, you’re gonna see this number go higher and higher and now with Red Hat, you throw that on top of this, this is a game changer.

Frank Curzio: 08:35 So IBM with that dividend, with this, game changing acquisition. I think it’s a steal at this price. Of course it’s gonna come down, don’t worry about it coming down after earnings. Again, it ran up tremendously into that earnings report, no matter what they reported, and even if they were much better than that, you probably would have saw a little bit of decline in the stock. That’s what happens.

Frank Curzio: 08:55 But right now, even when I look at Amazon which I have in our portfolio, we’re up nearly 100 percent on in our portfolio. Give that one away. Again, people say “Frank, you really recommend Amazon in your portfolio? I don’t need you to do that.” Well, you’re right, but for me, when I researched every single cloud company on the planet, Amazon was it. This was like a year and a half ago. There was no one even … IBM now, yes, cloud hybrid, stuff like that, but I’m talking about looking at all the cloud providers, Amazon was just dirt cheap, and I even said that in my newsletter. Look, I know you guys don’t pay me to recommend Amazon, but Amazon is a steal right now, and it’s up 100 percent. Sorry! Sorry for getting your stock’s up 100 percent. I’ll try to do better.

Frank Curzio: 09:34 But, and I’m not being arrogant there, I talk about my loses and stuff. But it’s … I think if I had a choice to buy Microsoft at this price, Amazon at this price, or IBM, I think IBM is clearly, clearly the stock that I would be buying right now out of those three. And I think you’re gonna see a lot of institutional money, a lot of institutional money fall out of those names and even out of the FANG names and into IBM in 2019. And I’m even reading reports from Goldman, and a lot of these guy’s been negative on it, and they even said “Yeah, margins are looking good, we just wanna see margins get a little bit better before we really get positive on this thought, but this looks pretty good.” So even the guys who hate this stock are looking at this transition and saying “You know what, it’s pretty good. Let’s see if they can continue to increase their margins and see if they can increase revenues,” they had three straight quarters of revenue declines, again, not the data point you should be concerned with.

Frank Curzio: 10:26 But I expect upgrades from Goldman over the next six months, a lot of these research firms, still a lot of negativity at IBM. But they’re here, they’re making transitions, margins are going higher, they got a good balance sheet, paid a good dividend, and now, now they’re growing on their own, but they’re taking over a company that’s growing like crazy. Five, six, seven times the market. It just makes sense. I think buying the stock here, you’ll thank me in three, four, five years cause this thing is really gonna take off. That’s how I feel.

Frank Curzio: 10:54 Okay, to the next question, from Brandon.

Frank Curzio: 10:57 “Hey Frank, I own a small collection of stocks for growth appreciation and generate a hold until they hit a preset target so I avoid being what Buffett calls a hog, that would be taken to slaughter, and I take this money and use it to purchase long term buys like dividend aristocrats. However, there’s usually a slow and steady move, so it’s easy to stay to my plan. I own Apache which Chevron just announced making a bid for the company at 65. My target was 61.50 so I’m up 50 percent plus in eighteen months. I also heard that Occidental Petroleum made a $70 offer that was rejected. Is there a general rule you have, or at least you’ve learned, through all your experience on timing and how these bids generally work out? Is it best to sell right away when a bid is made or hang in there ’til the close or at least the end of the close in case there’s a bidding war, ’cause it makes more sense financially? Thanks for all you do, and special thanks to your family that allows you to be shared with us.”

Frank Curzio: 11:59 Now Brandon listen I appreciate that and this is a really good question cause we see companies get acquired and if you’re lucky enough which you are, so you gotta be lucky sometimes, which is cool, Apache is a good name, but to actually own a stock that gets acquired is a lot of fun right? You get to get that money right away, it’s a huge bid … usually at a huge premium, that’s what you saw at Anadarko. And here’s how I would play it and I love this question.

Frank Curzio: 12:26 There’s not a general rule, but here’s what you need to look at when you see something like this happen. One is when you’re looking at Apache specifically, okay here’s a stock that was trading at $46 and this was in mid-April when Chevron decided to say “Hey, we wanna purchase you guys at $65” and now it’s trading at $64 so it’s a 25 percent difference. So when you look at this by itself, forget about Occi, which is Occidental Petroleum, simple, it’s Occi. Now the company, Anadarko actually came out and said that Occidental was trying purchase them at a higher price. They actually said that. So this isn’t speculation, “Oh there’s other people in the market trying to purchase it.” No! The company actually came out and said this, but they chose Chevron for a number of reasons. I mean you saying “Well it’s $5 a share, why don’t they accept the higher offer?” Because Chevron is a god. They know everything, they’re into everything. It’s almost like Apple coming to buy you, or a smaller technology company that’s less than half its size. I mean, it’s a big difference.

Frank Curzio: 13:33 Do you wanna go with the other company that doesn’t have as much experience and not saying that Occi’s a bad company, been around forever, but Chevron and Occi … those are two … two big companies … huge difference between those two companies.

Frank Curzio: 13:49 Now, without the Occi bid, I would tell you sell the stock right now. Why? Because if anything goes wrong with this or the Justice Department comes in and says “Hey, no, it’s not gonna happen,” like they did with Sprint and T-Mobile, which makes no sense to me. It makes zero sense to me why you wouldn’t approve that deal. Even with that deal, they’re still ranked number three in wireless. And I have no idea why would they not approve that, I mean there’s so much competition in the space anyway, I have no idea. But sometimes the Justice Department makes … just like the Time Warner AT&T deal. There was no way that they couldn’t let that happen, it’s two different verticals. No way they couldn’t make the deal happen.

Frank Curzio: 14:27 So you never know what’s gonna happen. But if anything does happen, the negotiations are off, you’re gonna get crushed on the stock right, it’s gonna go back down to where it was trading in the forties. So that’s why … and what you are looking for right now? They said they’re gonna purchase $65, it’s $64, it’s $64 right now. So you’re looking for a dollar upside and $20 downside, it makes sense to sell it. Now you do have this other offer on the table, for $70, so now you’re risking five dollars for 20 something. It’s probably better to sell it, I mean if there’s a bidding war and sometimes, I forgot the company that Verizon purchased from AT&T. Man, it was someone that was short on it … that thought this stock should have been. You know what, I’m actually going to take a second and try to find this, because this would be a good example. If I can, find this. Hold on.

Frank Curzio: 15:26 So it was, I’m having trouble finding it, I wish I could find it. But it was a company, man I can’t believe I can’t remember the name of it. And just a wireless company that just was a small competitor and I know there was a short … a firm just basically wrote a whole negative report on this thing saying it’s worthless, and these guys were going 30, 40, and they bid all the way up to well over 100 dollars, I think, by the time this thing got taken over. You don’t see that often, you don’t see that often.

Frank Curzio: 15:56 But with this you’re risking five bucks, I mean for me, I’d probably sell it. But you do have that bid on there, and just to show that there’s no rules, I try to explain this to everyone. Where, there’s no system that’s perfect. If there was one system that worked, everybody would use it.

Frank Curzio: 16:12 So I’d like to tell you that as soon as they make that announcement, just sell the stock, and you’d be safe doing that right cause you just got a huge premium, but I owned a company last year that got acquired and I thought that the person [inaudible 00:16:28] smart city company, it’s in the smart city space that was getting acquired. And was getting acquired I think for 50 percent premium or whatever so will up nicely on the stock. It was so cheap, the price that they were taken over this company and I thought there would be another bid so I said “You know what, hold out, because at this price, there is a good shot that somebody could come in or if it doesn’t, they’re definitely not gonna … they’re definitely gonna take over this company right, especially at this price.” So I said “Listen, just hold off.” And it took six month, nine months I think, for the deal to really, you know by the time they announce when a deal’s getting acquired compared to when they actually do it. Just like IBM and Red Hat, they announced it you know a while ago and they’ll probably another six months before we see that deal actually take place and Red Hat be integrated into IBM.

Frank Curzio: 17:14 And for nine months, I think we held the stock and we didn’t get another bid, but I was confident, where hey, we’re not gonna get lower than this price and there’s a shot we can get 15, 20 even 30 percent higher cause that’s how much I really thought this company was worth. When I look at Anadarko and where it’s come from, you could say “Hey you know what, it’s an amazing buy, because it was just in the forties, 42, 43, now they’re offering 65.”

Frank Curzio: 17:40 But if you go back, I mean even, you’re looking at less than a year ago, I mean this stock was trading in the 70s and just got crushed because oil was getting crushed before oil price really came back a little bit since January. But this name really got crushed, so they’re paying like a discount to where it was trading nine months ago. And that’s where you find out, where you look at the year chart, but if you look at the one month chart, you’re gonna see the stock trading in the forties, in the forties, and bomb they come up with 65. I think that Chevron’s getting this stock for a steal at this price. You could get a little bit higher, but I don’t think you’re gonna see anyone else outside of Occi come in and I don’t think you see Chevron, if Chevron … they’re already accepted Chevron’s for $5 less, maybe Chevron comes in at $70 also. But I just think, right now that bid on the table, it does provide that floor for you, where you don’t have to worry as much.

Frank Curzio: 18:34 But these are the things, and I’m talking you through this, it’s … so I’m not giving you a direct answer, but I’m talking you through it as if I would own this stock and what I would do. And what I would do is I’d probably take my profits. It’s at 64, a dollar or you’re looking at $5, but if anything goes wrong, and Occi comes out and says “Hey, we just discussed it with them, we weren’t gonna bid for them.” And then these deals fall apart with Chevron, this thing’s gonna go back to the forties and you’re gonna get crushed on the stock that you just made a lot of money on overnight. Like you said, you had that price target and eighteen months you’re already at 50 percent plus which is great. Those are great returns. Don’t get greedy. And I just … risk/reward wise, you’re probably better off selling it here and remember the opportunity cost. What do I mean by that? Well while you’re holding this, and you’re up 50 percent and that’s a money, there’s a names that you could be putting that money into that look fantastic and if you’re holding this, this deal’s probably not gonna get completed for six months I would say, at least.

Frank Curzio: 19:29 So this is dead money right. So it’s six months where okay maybe someone comes in at 70, okay fine you did a good job, but … and that’s less than ten percent gains of what you’re looking for, an extra ten percent, but think about the opportunity cost where if you’re selling that, now you have that money in your account, now you’re looking at everything fresh starting earning season, maybe you see something that you really love, like an IBM, that reported good numbers and fell. You’re seeing that across the board with a lot of great names, cause a lot of these names are up tremendously since January after the December sell off. They’re reporting these hit numbers and they’re selling off three, four, five percent which is fine. That could be an opportunity for you to jump into one of the names that you like or several names that you like.

Frank Curzio: 20:08 So these are the things I think of. I can’t give you the perfect answer, but the safe play is to sell after the acquisition, because most of the time, if I had to put a percentage on it, I’d say 80 percent of the time, 85 percent of the time, you’re not gonna see another offer. I mean companies are smart about this, they hire teams at Goldman Sachs and Morgan Stanley, they put the numbers together, they understand that there’s other companies that might be bidding for these assets. They’re not gonna just under ball, just provide a low price to try to buy something, opening up the door for competitors to come in cause there’s just gonna be a bidding war and they’re gonna get crushed, so there’s a whole process behind this and that’s why you usually don’t see a bidding war with a lot of these companies, especially in a market like this today, where growth’s kind of uncertain, it’s not like we’re in the tech bubble where everything’s just looking to be purchased and everything goes higher and higher and higher.

Frank Curzio: 20:57 But that’s my advice on Anadarko. Again, nothing definitive, but I just believe that it would be smart to take money off the table. You’d be able to put it into other things, and you take a lot of that risk off as well, because at the end of the day you’re looking to make less than 10 percent gains on a stock that you’re up over 50 percent on. I’d take the profits and run. Probably that’s the best advice.

Frank Curzio: 21:20 Moving on. Last question here’s from Alex.

Frank Curzio: 21:24 Says “Hey Frank, I hope everything turns out well for your wife. I had my wife listen to that section of the March podcast where you talked about it.”

Frank Curzio: 21:33 And when he says, “talked about it,” my wife was going for tests because they thought that … she had to get a biopsy, they thought she might have cancer. She’s a cancer survivor, a breast cancer survivor, this was more about her ovaries and that. I talked about it, which is frustrating because think about it, we talked in March right and now I’m answering this question now. That’s how long it takes to get tested for someone who had cancer already. Yeah, I think it should’ve been a little bit faster, so you know Alex goes on “My wife’s quite familiar with you in the sense, I will mention Frank said this, or one of Frank’s quests said that, after discussing something business related either personally relevant or in general that you may have covered. She’ll actually make a joke about it, saying that there you go again talking about your buddy Frank. As being someone whose listened to your podcast in Street.com days and getting some insights into your family along the way. I can’t help but really feel for you, and feel connection on some level even though we have never met and I really don’t know you. My thoughts and prayers go out to you. Alex.”

Frank Curzio: 22:29 Alex, that’s the ultimate compliment and I appreciate that. I’m trying to fight for main street here and bringing Wall Street expertise and trying … it’s been going well, we’re growing our business, things are cool, I felt a lot of you listen to this, followed my career for a long time, and I’m always humbled by that. But I did take this question because we just got the results from my wife’s tests and she’s cancer free, so I wanted everybody to know that. There’s a lot of you that emailed, I couldn’t believe how many emails came in, I try to answer as many as I can. These days, we have investors coming in to our security token offering still. A lot of things going on, hiring, just growing the market and spending time with the family, growing the business I mean, and spending time with the family. It’s been crazy. I try to answer as many emails as I can. I really, really appreciate man, I love you guys. I didn’t expect that. So many people emailing and say hey I hope everything goes well. You always feel like family to me, it’s great, I feel like that’s why I spend so much time at conferences and say “Hey, let’s see a podcast.” You know I always spend time with you and say hello and say thank you and stuff. I think that’s my responsibility. Anyone’s responsibility to do for their customers.

Frank Curzio: 23:38 But yeah, she’s cancer free, everything turned out great, we were a little worried there, it took a couple months to get the results back, and all the tests and everything. She did show a lot of signs, so again we were a little nervous, the docs are nervous, but everything came back okay and thanks so much for all your prayers, I really appreciate.

Frank Curzio: 23:54 So, I’m gonna leave it there because the holiday, holiday weekend, Easter, hopefully you get to spend time with family, again don’t talk politics, just enjoy it. I don’t know, watch sports, watch hockey playoffs, watch basketball playoffs. Don’t watch baseball. So tough being a Mets fan, they always get off to a good start, and then look what happens, but anyway, try to enjoy it. Have some beers, hang out, have some fun and really enjoy the holidays guys. I wanna appreciate, to say I appreciate all of your support, all listeners always write it, feel free to write in, ask any questions, I try to answer as many as I can, I have Frank@CurzioResearch.com. That’s Frank@CurzioResearch.com. Have a great weekend, that’s it for me. I’ll see you guys in seven days. Take care.

Announcer: 24:45 The information presented on Wall Street Unplugged is the opinion of its host and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility. Wall Street Unplugged, produced by the Choose Yourself Podcast Network, the leader in podcasts produced to help you choose yourself.


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