Real estate gets healthier Investors should brace for more deal-making in the real estate sector, which experienced major trauma in the financial crisis of 2008 but is far healthier now. Back then, a lot of real-estate firms were caught with too much debt and quickly-falling cash flow to support that debt, while major properties saw a spike in vacancy rates.
A great example is iStar Financial (NYSE: SFI), which saw its shares plunge from $50 in 2007 to below $2 by early 2009. I discussed the real-estate lending firm's woes in great detail last fall. Shares have risen about 20% since then, but remain vastly undervalued. As a result, there's a big chance a larger real-estate player may swoop in and pick up the company while it's selling on the cheap.
Importantly, iStar has cleaned up its balance sheet, retiring nearly $1 billion in debt in the most recent quarter. With concerns off the table that a weak economy would trigger fresh bankruptcy possibilities, investors can again focus on the value of iStar's financial assets. The company carries roughly $8.2 billion in assets, and after liabilities are deducted, still carries $1.7 billion in equity. These numbers already account for any distress iStar may be seeing among its properties and loans to other developers.
Meanwhile, the whole company is being valued for just $625 million by investors. The sharp disconnect has led iStar to buy back stock (a $65 million new buyback program replaced one that was recently completed). A larger player could potentially come in and offer a 30% premium to the current share price and still get iStar's assets at a sharp discount to their real worth.
Risk to consider: These specific companies may not get a buyout offer and instead may find their rivals in play. This is why it pays to look at all of the players in a sector and determine which might provide the most upside for any buyer. You should never buy a stock simply in hopes it will get acquired, but instead view it as just another positive catalyst to your investment thesis. These stocks (with the exception of the chip stocks noted above) are very inexpensive right now, which makes them a bargain whether a suitor emerges or not.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.