Why the M&A Peak Is In: Sell These Two Stocks

Why the M&A Peak Is In: Sell These Two Stocks - merger acq


"Pretty ugly."


That's how Hedgeye Financials analyst Jonathan Casteleyn sums up the current global mergers and acquisitions market. “We think people are being complacent," he says. "This is a counter-trend that’s not widely watched.” It doesn't bodel well for boutique M&A-focused investment banks like Greenhill & Co. (GHL) and Lazard (LZD).


Here’s why.


Worldwide M&A by deal value amounts to $292.7 billion so far in the first quarter of 2017. That's down -9.9% year-over-year. The problem is exacerbated by North America, where M&A is down -16.9% at $142.4 billion. The picture looks pretty bleak. 


Why the M&A Peak Is In: Sell These Two Stocks - global m a


The peak may be in. A look across cycles shows just how “fully valued” M&A is right now, Casteleyn says.


In the past three cycles 1999, 2007, 2015-2016, M&A deal announcements to U.S. GDP spike above the long-term average of 9.9%. Last year, that number crested at 16.4%, which is “a very, very healthy level.” Casteleyn says. That should start to drop off as we head into 2017 and 2018.


Why the M&A Peak Is In: Sell These Two Stocks - depressed activ


A few looming risks will exacerbate the past-peak trend in M&A. Super low interest rates have fueled the market for some time now. That’s obviously beginning to change. “Since mid-2016 and the Trump election borrowing costs are going up,” Casteleyn says in the video below. “That means affordability goes down on a go-forward basis.”


Moreover, Fed rate hikes will essentially "pull the rug" out from under M&A advisory shops. Going back to 1987, previous Fed tightening cycles have caused corporate credit spreads over Treasuries to rise between 20 and 2,000 basis points. Our research shows that for every 100 basis point increase in credit costs historically, year-over-year M&A activity decreases by -20%.


Meanwhile, private equity buyers are beginning to pull back. That matters because private equity shops are typically the last incremental buyers before the air comes out of the M&A market. As you can see in the chart below, private equity purchasing spiked in 2007, to 30% of all M&A deals, and again in 2015, to 25%.


The average of private equity to total M&A deals over the last 13 years is 18%. “Private equity remains at elevated levels and that is a warning sign that as we move into 2017 and 2018,” Casteleyn says. “The incremental buyer is coming out of the market.”


Why the M&A Peak Is In: Sell These Two Stocks - private equity marks top


How do you play the coming tumble in M&A? “You want to look at the boutique, undiversified names,” Casteleyn says, M&A advisory companies like Lazard (LAZ) and Greenhill & Co. (GHL). Mergers and acquisitions make up roughly 80% of Greenhill’s top-line revenue and 55% of Lazard’s.  This compares to 10% for a more diversified bank like Goldman Sachs (GS). (Casteleyn recently added Lazard as a short to his Best Ideas list.)


Bottom line? “The big deals have been done,” in the M&A space Casteleyn says. As the air comes out of the market, stay away from Lazard and Greenhill.


Watch Casteleyn make his case in the video below.

Sell Wabtec: The Beginning of a Much Bigger Unwind?

Sell Wabtec: The Beginning of a Much Bigger Unwind? - wabtec sell


It's another bad day for Wabtec (WAB) investors.


The stock took a tumble yesterday after the $6.7 billion rail equipment manufacturer missed Wall Street analyst earnings estimates. Full-year 2017 guidance came in a little light too. The company expects earnings in the range of $3.95 to $4.15 per share.


The bleeding in Wabtec shares extended into Wednesday trading. Shares are already down -8.5% so far this week.


This is only the beginning of a much bigger unwinding, writes Hedgeye Industrials analyst Jay Van Sciver in a recent research note. “The release makes it clear that management has now lost the ability to spin the cyclical downturn… we think it is still early in the WAB unwind,” he says.


“For a management team that has gained the faith of investors by always delivering,” Van Sciver continues, “the quarter and initial guidance represent a significant challenge.”


He has been bearish on the stock for some time now. His thesis has long been that Wabtec is in the midst of a cyclical downturn that has historically been really detrimental to the company’s margins.


Van Sciver hosted an institutional call in December 2016 to refresh his thesis. After a major investment cycle in rail equipment, over the last ten-plus years, the industry is slowing explains Van Sciver in the video below from that research call. Back in 2007, the average age of private railcar equipment was more than 20 years old. Today the average age is about 13 years old.



“What we’re seeing is a major down cycle and historically that has tended to crush Wabtec’s margins,” Van Sciver says. “We’re looking at the youngest railcar fleet of the post-war period,” he says. “That’s big. This is no minor cycle.”


Wabtec has tried to plug the gap with the acquisition of French rail company Faiveley but it won’t be enough to save Wabtec, Van Sciver says. European transit rail is coming off its own investment cycle, after deregulation and other factors led to substantial investment, he says.


In other words, Wabtec has been dodging this cyclical downturn in its core business for some time through cost cutting and acquisitions. As reality gets priced-in, this may be just the beginning of the pain for shareholders. We say stay away from this one. 

Poll of the Day: Does the European Union Exist 3 Years From Now?

Takeaway: What do you think? Cast your vote. Let us know.

Poll of the Day: Does the European Union Exist 3 Years From Now? - europe union


Poll of the Day: Which Do You Trust the MOST?

Poll of the Day: Which Do You Trust the MOST? - psychedlic goat


30% Upside: Whole Foods Institutional Call Today at 11am ET $WFM

Takeaway: Join us for a review of our WFM Long thesis today on why we think shares have 30% upside.

***We are hosting a Flash Call at 11:00 AM ET to go through our LONG thesis for WFM.  Contact for more information and access. 


30% Upside: Whole Foods Institutional Call Today at 11am ET $WFM - z founder


Whole Foods Founder John Mackey is taking back control of the company and has called for a slowing in store growth, focusing efforts now on costs and cash flow. This pivot for an industry leading growth company doesn’t happen often (think SBUX, MCD, TGT). It requires a period of revaluation and reset expectations. But it is also followed by significant outperformance if done correctly. That’s the road ahead we see for WFM.



Whole Foods reported another disappointing quarter last week, but more importantly they laid out a new path forward for the company.  We published a note last week that explained why cutting capex is exactly what they need to do in order to improve the performance of this company. With John Mackey back in charge, he is taking the bull by the horns and returning this company to its roots by focusing on the core Whole Foods consumer.


This first cut is deep, but they can go deeper once they work through sites that are already in development, cutting capex to only maintenance and other necessary expenditures. We have seen this story before, and will provide examples of companies that grew too fast into an increasingly competitive environment, getting ahead of their skis and falling on their face. Pulling back on growth capex for a couple of years will allow them to refine their current footprint and accelerate profitability.


The core Whole Foods consumer is still alive and well, and by no means do we believe that the Whole Foods brand will die in the face of conventional competition. We will lay out in detail how we anticipate their new way forward to unfold, including conversation on their capital expenditure plan, the focus on the core consumer and how category management will change the way they operate.


30% Upside: Exact Sciences Institutional Call Today at 1pm ET $EXAS

Takeaway: Join us for a review of our EXAS Long thesis today on why we think shares have 30% upside.

Please contact for further information.  An invite with dial-in instructions will be sent to subscribers ahead of the conference call.

estimates too low; short interest to fuel +30% UPSIDE

We are hosting a call today at 1:00PM ET to review our Exact Sciences (EXAS) Long thesis. With short interest still elevated at 30.6% we see significant upside heading into 2017 as consensus sales estimates are too low at $163.2M which implies a massive deceleration in either provider adds, tests per provider or ASP. We have developed a reliable tool to gain visibility into EXAS's provider count and will be watching this tracker closely over the next few months.


30% Upside: Exact Sciences Institutional Call Today at 1pm ET $EXAS - Sensitivity Table


With a series of clinician and former executive interviews, combined with data from the National Ambulatory Medical Care Survey (NAMCS) we gained new insights into the colon cancer screening market and Cologuard's role in it, which stand in contrast to the short seller narrative.  We'll review our addressable market analysis that estimates Cologuard's potential annual test volume to be 2.7M, or 2.0M for the commercially insured population and 0.7M for Medicare. We will also review EXAS provider adoption model and provide our thoughts on the bigger questions around payor contracts and dormant physician accounts. We see +30% upside in the near term, but also believe we have visibility into an opportunity to pivot short when growth starts to slow.


30% Upside: Exact Sciences Institutional Call Today at 1pm ET $EXAS - exas short interest 2 16 17


30% Upside: Exact Sciences Institutional Call Today at 1pm ET $EXAS - 11111111111111


  • Addressable market analysis including state level detail on provider adoption and number of tests
  • Screening vs. Non-Screening colonoscopy market analysis
  • Medicare's past growth and why commercial insurance will drive EXAS future
  • Dormant vs Active Providers
  • Consensus numbers and why they're too low
  • Review of short case and the current short interest level

Thoughts into the (Pre-Announced) print

On January 8th Exact Sciences reported preliminary revenues for 2016 of $99-$99.5M implying 4Q16 revenues of $34.9-$35.4M. EXAS is scheduled to report 4Q16 and full-year 2016 results on Tuesday, February 21st. For 4Q16 and full-year 2016 we are expecting EPS of ($0.38) and ($1.68) compared to consensus of ($0.39) and ($1.69). For the fourth quarter we are modeling COGS at $178 per test and expect to see Sales and Marketing expense of $32.8M due to higher television ad campaign spend.