Following the first down week for the broad-based S&P 500 in quite some time investors were looking for something positive to start their work week, and a bevy of economic data gave them what they were looking for.
Industrial production for May increased by 0.6%, more or less in-line with expectations, but a nice improvement from the 0.3% contraction noted in April. It's also the third time in four months that industrial production has expanded. For investors, seeing industrial production expand likely signals that business and consumer demand is still improving. It probably also means that businesses pricing power remains strong, which is a good sign if this rally is to continue.
Similarly, capacity utilization expanded to 79.1% in May from 78.9% in April. This is simply a measure of business and factory efficiency and demonstrates that we're getting increasingly closer to the economy running on all cylinders.
Even the National Association of Homebuilders Market Index moved in the right direction with a fresh reading for June of 49 compared to a reading of 45 in May. This NAHB index signals that homebuilders are feeling more confident about building and selling homes, especially with lending rates dipping back down again. Still, I remain leery of the sector as a whole given consumers' avoidance of new loans and refinancing when rates move higher by even 25 basis points. I worry what will happen when rates really begin to normalize closer to their historic average.
Despite this flurry of positive data, the S&P 500 managed to only slightly edge higher by 1.62 points (0.08%) to close at 1,937.78. But, just because the S&P 500 hardly moved doesn't mean there weren't big gains to be had across the board.
Leading the charge to the upside today was storage memory platform provider Fusion-io (NYSE:FIO.DL) which surged 22.4% after SanDisk (NASDAQ: SNDK) agreed to buy the company for $1.1 billion in cash, or $11.25 per share, a 21% premium to Friday's close, in order to take advantage of businesses growing data workloads.
Both companies' boards have approved the deal, and SanDisk anticipates that it'll close by the end of its fiscal third quarter. Furthermore, SanDisk sees the deal adding to its EPS by the second-half of fiscal 2015, and will be using its available cash on hand to fund the buyout. While I can see the long-term allure of this deal from the perspective of SanDisk, the negative EPS affect over the next year compounded with the fact that flash memory is already a highly commoditized business is enough to keep me safely on the sidelines for the time being.
Tulipmania continues in the hepatitis C sector, with clinical-stage hepatitis C-focused drug developer Achillion Pharmaceuticals (NASDAQ:ACHN) advancing 20.9% after Maxim Group analyst Jason Kolbert raised his firm's price target on the company from just $6 to $22. Specifically, Kolbert cites the expectation of "fundamental progress" with its pipeline as well as the intellectual property value of its nucleotide program as reasons why Achillion shares could soar more than 200%. As for me, I still believe Wall Street and investors have Achillion all wrong. We're talking about a company that's failed to get any investigational therapy past midstage studies and which had the development of its lead drug, sovaprevir, delayed by almost a year while on clinical hold. Meanwhile, some of its peers have already moved their next-generation oral HCV meds to market. Even if sovaprevir makes it to market by 2017, what sort of market share will be left by then? I'd suggest that investing in Achillion here is nothing more than gambling on a roulette wheel.
Lastly, continuing the merger Monday theme, shares of Covidien (NYSE:COV.DL), a medical device, medical supplies, and pharmaceuticals developer skyrocketed 20.5% after agreeing to be purchased by Medtronic (NYSE:MDT) for a whopping $42.9 billion in a cash and stock deal. While the deal does stick with Medtronic's goal of helping to expose it to overseas markets in order to enhance its growth prospects, this purchase also has a lot to do with the company moving its corporate headquarters overseas to Ireland where corporate taxes are lower. According to a Bloomberg report, Medtronic has garnered $20.5 billion in untaxed earnings from offshore subsidiaries that it wouldn't have to pay a 35% tax on and could instantly use if it reincorporates in Ireland. Of course, Medtronic noted the deal wasn't about lowering taxes, but from the perspective of shareholders this will singlehandedly be the biggest immediate benefit of the combination. While I remain a Medtronic fan over the long run, I'm a bit skeptical of how smoothly this merger will come about. As such, I might suggest holding off on purchasing Medtronic until we have better visibility on how successfully the two companies are at integrating their business segments.