Is the Market Overvalued? Billionaires Buffett, Dell, Ellison All Vote 'No'

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Financial contributor Jim Cramer provided an excellent introduction to his Mad Money television show on Tuesday, February 5. During his 6 p.m. post-market recap, Cramer discussed how investors are increasingly concerned about stock market valuations, with market indices at or near five-year highs. In addition, the S&P 500 is within close distance to Wall Street analysts’ full-year forecasts for 2013, and we find ourselves here in mid-February---early in the calendar year.

Cramer advised viewers to look to the market heavyweights of Michael Dell, Larry Ellison, and John Malone for guidance on whether the market is truly overvalued. Universally, all three of these men are demonstrated “buyers” of the market at current levels. Let’s take a brief look at the recent actions of these corporate dealmakers (ex-Malone) before reaching a conclusion.

Dell Corporation (NASDAQ: DELL)

On February 5, Michael Dell announced a $24.4 billion buyout deal of the company he founded in 1984, PC manufacturer Dell Corporation. During November 2012, investors valued Dell at less than $9 per share. Fast forward to February 2013 and Mr. Dell is offering $13.50-$13.75 per share for his company, a considerable premium when compared with not-too-distant market prices. Suddenly, institutional investors are coming out of the woodwork and demanding they receive a higher price for their Dell shares.

Wall Street analysts believe that a deal will get done close to Michael Dell’s offered price of $13.65, and not the higher premium that the largest shareholders are demanding. Earlier this morning on February 14, Michael Dell agreed to value his own personal stake at a lower price of $13.36 in hopes of gaining consensus approval.

Oracle (NYSE: ORCL)

On February 4, Oracle Corporation announced its acquisition of Acme Packet for $1.7 billion or $29.25 per share. The Wall Street community has labeled Oracle CEO Larry Ellison as a “serial acquirer,” as his company has a rich history of making smart bolt-on acquisitions of various sizes.

Prior to the announcement, Acme Packet was trading around $24, although shares traded as low as $15 during October 2012. In contrast to recent market prices, analysts note that APKT traded as high as $83 in April 2011. Therefore, Oracle’s purchase seems to have great value on this relative basis.

Wall Street insiders believe that Larry Ellison isn’t done with his acquisition spree. Investment research firm William Blair believes that Oracle’s recent acquisition of Acme Packet makes the possibility of a BroadSoft (NASDAQ: BSFT) takeout even better. The $1 billion dollar BroadSoft designs software for mobile, fixed-line, and cable providers to deliver a technology called “unified communications” (UC) over their networks. William Blair believes an Oracle acquisition of BroadSoft would allow Ellison to compete with his largest competitor Microsoft, which is offering its own Microsoft Lync 2013 for unified communications.

BroadSoft reports fourth quarter 2012 earnings on February 27 after the market close.

Berkshire Hathaway / 3G Capital

On February 14, market participants received news that Warren Buffett and Brazilian investment firm 3G Capital entered into a firm deal to purchase the H.J. Heinz Company (NYSE: HNZ), the iconic Pittsburgh-based company and manufacturer of America’s favorite ketchup.

Somewhere the investment gods are having a good belly-laugh. The previous day on February 13, research analysts at UBS downgraded Heinz to Neutral from Buy due to valuation. While UBS’ call is perfectly sound for the near-term, Buffett is looking at a return-on-investment with a 5-year, 10-year, and 20-year time horizon. Goldman Sachs also had a “Sell” rating on Heinz shares going into the announcement.

Officials at H.J. Heinz stated that keeping the company’s headquarters in Pittsburgh is written in the merger documents, although management changes have not been discussed. 3G Capital, which also owns Burger King Worldwide, will be the operational partner in the $28 billion takeover. For more information on 3G Capital, please reference my article Heinz Ketchup: Only Available on a Whopper Sandwich?.

Foolish Bottom Line

What’s the lesson here? My takeaway is simple: it’s still a good time to own stocks for the retail investor. Despite tepid growth in the world’s economies, Corporate America has the strongest balance sheet in decades, collectively holding trillions of dollars in cash. With interest rates at historic lows, deal making is bound to continue.

Even in the absence of future deals, valuations at large cap companies are supported by strong free cash flow and healthy dividend yields. For instance, technology giant Dell Corporation has a pristine balance sheet, and the company’s dividend yield of nearly 2.5% is significantly higher than US Treasuries. Readers should look for large-cap companies of a similar nature, and there are plenty of them. These stocks will be pushed higher in the search for safety and yield.

Thanks for reading, and consider subscribing to my posts for more Fool ideas on outperforming the market. Requests for future articles may be submitted to fool@johnmacris.com.


johnmacris worked as an independent contractor for Burger King Worldwide during 2011 and 2012. johnmacris has no position in any stocks mentioned. The Motley Fool recommends H.J. Heinz Company. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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