The stars are aligning for a pick-up in merger and acquisition (M&A) activity on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index in the current half after a subdued start to the 2019 calendar year, according to Morgans.
I am not sure if we will see a takeover feeding frenzy but conditions are ripe for bidders to pounce given the falling interest rate outlook, weak earnings environment and rising cost pressures.
Acquisitions could be the fastest and cheapest cure for the malaise and Morgans sees upside risk to deal activity.
Strong survive and the weak gets bought out
“As the ASX 200 Index approaches its all-time high, the recovery has been far from even. Similarly, at the sector level, a wide divergence of valuations suggests that growth and opportunities are still very patchy,” said Morgans.
“Low growth and falling interest rates have made structural growth and high yielders far more attractive while cyclical stocks have had a few false starts and are yet to find genuine support.
“In this environment, the strong survive and weak do not – asset mispricing provides a catalyst for opportunistic M&A.”
How to position your portfolio for M&A upside
The problem is that buying a stock based on its takeover appeal is seldom a good working investment strategy for retail investors, although the broker thinks it could be part of the stock selection criteria.
“While buying companies purely for the potential of a takeover is a fraught strategy, we think it can offer some downside protection for embattled names or help peers realise value in more structurally challenged sectors,” added Morgans.
Some of these distressed sectors include mining services, aged care, retirement-exposed businesses and retail.
The broker has identified 48 possible takeover targets on the ASX but a handful stand out as more likely candidates to attract a suitor.
Most likely M&A ASX targets
The first is gas pipeline company APA Group (ASX: APA) even though Hong Kong-listed CK Infrastructure Holdings had tried and failed to buy over the company.
However, Morgans has heard rumours that others are running the ruler over APA Group and the company’s open register means another bid could be in the pipeline.
Other potential targets are heavy equipment rental group Emeco Holdings Limited (ASX: EHL) thanks to its dominant market position, fibre network company Superloop Ltd (ASX: SLC) which is trading at book value with most of its capital expenditure already spent, and logistics group Qube Holdings Ltd (ASX: QUB) as construction risks at its Moorebank intermodal terminal eases.
You won’t have to look much further for other good value stocks to put on your radar. The experts at the Motley Fool have picked some of the best buying opportunities for FY20 and you can find out what these are by following the link below.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th
Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of SUPERLOOP FPO. The Motley Fool Australia has recommended SUPERLOOP FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
- Why the Coca-Cola share price and these ASX stocks just got upgraded by brokers to “buy” – August 7, 2020 4:10pm
- The latest ASX 200 stocks downgraded by top brokers – August 7, 2020 3:06pm
- Worley share price jumps on contract win and is my key pick in the sector – August 7, 2020 12:33pm