Speculative Stocks Are Too Cheap, According to Would-Be Acquirers

Stocks continued their 2023 recovery on Friday, with modest gains for the S&P 500 (^GSPC 1.06%) and Dow Jones Industrial Average (^DJI 0.60%) but another solid performance from the Nasdaq Composite (^IXIC 1.42%). Even amid ongoing concerns about the economy, investors seem to believe that the stock market is too cheap to pass up as it builds momentum.

Data source: Yahoo! Finance.

Part of what is giving ordinary investors more confidence is that major institutional investors are starting to step up with proposals to buy out companies that they think look attractive from a valuation standpoint. Indeed, throughout the bear market of 2022, some private-equity and hedge fund  investors have been particularly aggressive about snapping up stocks at bargain prices. Speculation swirled that more companies might be in the merger and acquisition crosshairs, including some well-known stocks that have fallen sharply.

Lucid shareholders look for clarity

The latest example of a stock making huge gains on takeover speculation was Lucid Group (LCID 3.36%), which picked up 43% on Friday. At one point during the day, Lucid's share-price gains were double where it closed at the end of the regular trading session.

The news that moved the stock involved the possibility that the Saudi Arabian Public Investment Fund might choose to purchase the portion of Lucid stock that they don't already own. The Saudi investment vehicle has a majority stake in the electric vehicle manufacturer, so buying out 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 EV manufacturer has extensive short interest among those betting against the company. According to Yahoo! Finance, 22% of Lucid's available float was sold short as of Jan. 13, representing nearly 165 million shares. Until today, selling Lucid stock short had been a highly profitable move, as the shares went from above $27 in early 2022 to below $7 toward the beginning of this month.

Lucid is one of many EV companies trying to tap into huge demand in the industry, but it's well behind some of its competitors. Despite offering beautiful vehicles, Lucid hasn't been able to ramp up production to meet demand as quickly as shareholders had hoped.

Will the Fed stop private equity?

Lucid isn't the only stock by far to see speculation about takeovers. Indeed, several buyouts of beaten-down technology companies have actually happened in recent months. Earlier this month, insurance-tech company Duck Creek Technologies (DCT) got a buyout bid from Vista Equity Partners after the stock had fallen from nearly $60 per share in February 2021 to just $12 per share last month.

Thoma Bravo made a deal to acquire Coupa Software (COUP) in December, sending the stock soaring. The $81-per-share offer price was double the business spending management software specialist's lowest levels in November 2022, but it was a tiny fraction of the nearly $350 per share that Coupa fetched at its highs just two years ago.

Some investors have feared that high interest rates would cause private-equity companies to pull back on their acquisition activity because of higher financing costs. However, many such investment vehicles are still flush with cash, and the prospects to buy companies on the cheap today with the intent of bringing them public a couple of years from now when the bear market could be long over seem attractive.

Market participants shouldn't expect that Fed monetary policy will put a stop to M&A deals. As long as private equity sees stocks as cheap, you'll see big moves like Lucid's one today.