Some further thoughts on the LU vs. CSCO scenario:
1. LU, with a PEG of about 2 (based on CY 98), is valued more richly than CSCO, with a PEG of about 1.33. I believe this is because folks think LU's earnings growth is going to accelerate when it acquires a data company in October or thereafter, and that CSCO's will decelerate at that time. But it makes LU more vulnerable to a disappointment.
2. This makes a paired trade, selling CSCO puts and buying LU puts (as Jan 99 or 2000 LEAPS) very attractive. I believe when October rolls around, one of two scenarios will play out: LU won't make an acquisition, and people will begin to believe it might lose the race to CSCO; or, LU will make the acquisition, but people will begin to see the risks - difficult integration of the corporate cultures, unlikely to be accretive to earnings for a couple years, normal selling on the news, etc - either way, LU's run will be over, at least for a while.
A paired trade like this would require no cash, and the worst case scenario is that one would be "forced" to buy CSCO at the put price. Best case scenario is that you make free money on the LU puts.
Comments?
Bob |
