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How a Weekend Steel Deal Could Fuel a 2024 Bull Market

Motley Fool - Mon Dec 18, 2023

The stock market has done exceptionally well in the last two months of the year. The Dow Jones Industrial Average has set new record highs, and other major market benchmarks are within a hand's breadth of reaching new all-time levels of their own.

For much of 2023, a handful of stocks powered indexes higher. However, it's evident that companies are starting to realize that the stocks that have gotten left out of the rally so far have intrinsic value of their own. The fact that those stocks have languished makes them attractive as takeover targets. That's what shareholders in U.S. Steel (NYSE: X) are seeing Monday morning, and the move could signal a wave of merger and acquisition activity across the industrial and materials sectors that could produce the next leg higher for the bull market.

Hot steel coming out of a manufacturing plant.

Image source: Getty Images.

A trans-Pacific steel giant

Shares of U.S. Steel were up 29% in premarket trading Monday morning. The Pittsburgh-based iconic steel company received a buyout bid from a Japanese counterpart that could reshape the entire steelmaking industry.

U.S. Steel and Nippon Steel announced that Nippon will purchase its American peer in an all-cash transaction valued at $14.1 billion. Shareholders will receive $55 per share for their U.S. Steel stock, while Nippon will assume roughly $800 million in U.S. Steel debt. The share price is 40% higher than where U.S. Steel closed on Friday.

For Nippon, the move diversifies its scope to make it a global powerhouse. The company already had extensive exposure to its home market of Japan as well as the countries in the Association of Southeast Asian Nations and India. The expansion of Nippon's U.S. production capabilities will give it a huge boost in reaching its eventual goal of producing up to 100 million metric tons of crude steel worldwide.

The news comes four months after U.S. Steel had announced its intention to pursue strategic alternatives for its business. It also may close the door to a potential acquisition from Cleveland-Cliffs, whose shares moved 9% higher in premarket trading Monday as well.

Plenty of attractively priced stocks

It might seem odd that companies would look to make acquisitions as stock market indexes approach all-time highs. However, the unusual bifurcation in the market has led some stocks to extremely high valuations while leaving others largely unfollowed and unloved.

For instance, among well-known large-cap stocks, you'll find plenty of pockets of companies with low valuations based on traditional metrics:

  • Many airlines have single-digit price-to-earnings ratios, including industry giants like Delta Air Lines and United Airlines Holdings.
  • U.S. automakers Ford Motor Company and General Motors both sport single-digit P/E ratios as well.
  • Some of the largest energy companies in the world, including ExxonMobil and Shell, have P/Es at or below 10.

Admittedly, P/E ratios aren't perfect. With companies that rely on considerable leverage in their operations, the rise in interest rates is still working its way through income statements. It could take some time for earnings to fall to reflect higher debt financing costs.

Yet investors have also seen interest in bargain stocks in other areas. On Friday, speculation arose that DocuSignmight seek to sell itself, either through a third-party buyer or in a leveraged buyout. The e-signature specialist has largely revamped its business, but its stock remains far below its 2021 highs.

If investors start to recognize the hidden value locked inside attractive-priced stocks, then it could help power the bull market further ahead in 2024. Many investors would applaud such a rotation as it would take away the arguments that the rally in stock markets has thus far had a relatively narrow focus.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends DocuSign. The Motley Fool recommends Delta Air Lines and General Motors and recommends the following options: long January 2024 $60 calls on DocuSign and long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

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