Why Amazon, Time Warner, B/E Aerospace, and More Are Trending

Wall Street has opened to gains today, as positive earnings reports and M&A activity have increased bullish sentiment. Just 22 minutes after the opening bell tolled, the Dow is already up by 120 points, while the Nasdaq is 0.85% in the green, and the S&P 500 has rallied upwards by 0.6%.

In this article, we’ll examine four stocks that have contributed to the market’s positivity through M&A activity, which are B/E Aerospace Inc (NASDAQ:BEAV), Rockwell Collins, Inc. (NYSE:COL), Time Warner Inc (NYSE:TWX), and AT&T Inc. (NYSE:T). We’ll also check in on tech giant Amazon.com, Inc. (NASDAQ:AMZN), whose shares are well in the green this morning, and examine hedge fund sentiment concerning all five stocks using SEC filings.

While there are many metrics that investors can assess in the investment process, the hedge fund sentiment is something that is often overlooked. However, hedge funds and other institutional investors allocate significant resources while making their bets and their long-term focus makes them the perfect investors to emulate. This is supported by our research, which determined that following the small-cap stocks that hedge funds are collectively bullish on can help a smaller investor to beat the S&P 500 by around 95 basis points per month (see the details here).

B/E Aerospace Inc (NASDAQ:BEAV) shares have soared by 15.6% after Rockwell Collins, Inc. (NYSE:COL) agreed to buy it for $34.10 in cash per share and $27.90 in shares of Rockwell Collins common stock, subject to a 7.5% collar. That translates to $62 per share, or $6.4 billion. Rockwell Collins is doing the deal because it expects the merger to accelerate growth and deliver run-rate pre-tax cost synergies of $160 million. In addition, the company expects the combination to deliver double-digit accretion to EPS in the first full fiscal year, with expected combined five-year free cash flow generation in excess of $6 billion. Although the deal sounds good in the long-term, traders have punished Rockewell Collins today to the tune of 5.07%, mainly because of shorting caused by merger arbitrage and the 22% premium that Rockwell paid to get the deal done.

B/E Aerospace and Rockwell Collins also each reported earnings today, with B/E beating both top and bottom-line estimates with third quarter EPS of $0.83 on revenue of $732.7 million. The Street was expecting $0.03 and $25.25 million less respectively. Meanwhile, Rockwell Collins earned $1.58 per share on revenue of $1.45 billion for its fiscal fourth quarter, versus Wall Street’s estimates of $1.57 and $1.48 billion respectively. Of the 749 hedge funds that we track which filed 13Fs for the June quarter, 33 were long B/E Aerospace Inc (NASDAQ:BEAV) on June 30, while and 17 were shareholders of Rockwell Collins, Inc. (NYSE:COL).

Amazon.com, Inc. (NASDAQ:AMZN) shares have rallied by 1.7% after Heath Terry of Goldman Sachs raised his price target on it to $1,050 from $920 and maintained his ‘Conviction Buy’ rating. Terry thinks that Amazon will report third quarter sales of $33 billion, which would top the Street’s consensus of $32.7 billion. In addition, Terry is optimistic about Amazon’s fourth quarter and the continued growth of its cloud division. Ken Fisher‘s Fisher Asset Management lowered its stake in Amazon.com, Inc. (NASDAQ:AMZN) by 1% during the third quarter to 1.98 million shares.

On the next page we’ll find out why Time Warner and AT&T are each down today.

Time Warner Inc (NYSE:TWX) and AT&T Inc. (NYSE:T) are both in the red despite the latter announcing this weekend that it has agreed to buy the former for $85.4 billion. According to the deal’s terms, Time Warner shareholders will receive $53.75 in cash per share and $53.75 in AT&T equity per share, good for a total value of $107.50 per share. That final price could change a little depending on the average price of AT&T around the time the deal closes. If the telecom’s share price is below $37.41, Time Warner shareholders will only get 1.437 shares of AT&T for each share of Time Warner they own. If the telecom’s price is above $41.35, Time Warner shareholders are only eligible to get 1.3 shares of AT&T for each share of Time Warner they own. As for why AT&T would want to pull the trigger on the deal, its management expects the deal to be accretive to adjusted EPS and free cash flow in year one.

Despite the premium, Time Warner is down because some traders doubt that the deal will be approved. AT&T is down because some traders don’t like the fact that the company is paying a premium and other traders are going short for the sake of merger arbitrage. Incidentally, AT&T also reported its third quarter results on Saturday, announcing consolidated revenue of $40.9 billion, adjusted EPS of $0.74, and free cash flow of $5.2 billion. The company’s board also raised its quarterly dividend to $0.49 per share from $0.48. 63 funds in our database were long Time Warner Inc (NYSE:TWX) at the end of June, while 55 were shareholders of AT&T Inc. (NYSE:T).

Disclosure: None