U.S. Stocks Rebound On Buyout Hopes

U.S. stocks bounced back Tuesday to recoup much of the prior day’s losses as investors found confidence in Dell Inc.’s deal to go private in the biggest leveraged buyout in years.

After briefly retrieving its position above the 14,000 level, the Dow Jones Industrial Average  ended up 99.22 points, or 0.7%, to 13,979.30. The blue-chip average had lost nearly 130 points on Monday, the steepest drop of the year.

The S&P 500 Index climbed 15.58 points, or 1%, to 1,511.29, with technology performing best among its 10 industry groups, all of which ended higher.

The Nasdaq Composite Index  advanced 40.41 points, or 1.3%, to 3,171.58.

For every stock that fell, roughly three advanced on the New York Stock Exchange, where 701 million shares traded hands. Composite volume surpassed 3.5 billion.

Elliot Spar, Stifel, Nicolaus & Co.

Dell Inc.’s shares rose 1.1% after the personal-computer maker agreed to be taken private in a deal valued at $24.4 billion. The buyout price represents a 25% premium over Dell’s closing price on Jan. 11 before rumors of the deal surfaced.

Share buybacks and leveraged buyouts are likely to increase as private-equity firms and corporations take advantage of the current phenomenon that has the S&P 500’s cash-flow yield more generous than the yield on junk-rated bonds, predicted Jack Ablin, chief investment officer at BMO Private Bank.

“Dell’s desire to explore the possibility of taking the company private last December reignited the trend,” he said. He noted the widening gap between the valuation differential between stocks and bonds.

Before the Dell disclosure, the company’s A-rated intermediate-term bonds were trading at a 2.7% yield while its cash-flow yield — free cash flow divided by the share price — was nearly 17%, “making an easy argument for the firm to consider buying some of its own shares,” noted Ablin.

Also on the deal front, shares of Virgin Media Inc.  jumped 18% after the U.K. pay-television provider said it was in talks with Liberty Global Inc.  about “a possible transaction.”

Momentum

The S&P 500 has risen 6% this year as politicians managed to reach a budget agreement and as American corporations reported better-than-anticipated fourth-quarter results.

That rise, as well as a recent influx of retail investors into stock mutual funds, has fostered a debate about whether the rally is getting long in the tooth — or alternatively, laying the groundwork for a longer rise. In the bull camp, Jim O’Neill, the soon-to-retire chairman of Goldman Sachs Asset Management, told CNBC Tuesday that the momentum for U.S. equities for the remainder of the year is a favorable one. See CNBC video of what Goldman’s O’Neill had to say.

Earnings reports were the trigger for some of the day’s biggest stock moves.

Computer Sciences Corp.  jumped 9.2%, best on the S&P 500, after hiking its earnings outlook for the year. Yum Brands Inc. fell 2.9% after the owner of the Pizza Hut chain reduced its profit outlook.

Archer-Daniels-Midland Co.  gained 3.3% after reporting quarterly profit that beat forecasts. Kellogg Co. shares rose 0.7% after the cereal maker reported less of a quarterly loss.

Of the 56% of companies that have reported fourth-quarter earnings, nearly 69% have beaten estimates, according to Thomson Reuters. Nearly 66% of those 278 companies reported revenue that topped forecasts.

Stocks found some support in the day’s economic data.

The Institute for Supply Management’s services index fell to 55.2% in January from 55.7% in December. Any number above 50% signals expansion.

When considered in combination with the better-than-expected manufacturing report last week, “one can’t help but feel that the private-sector economy is holding up fairly well despite the public sector’s best efforts to cause turbulence,” Dan Greenhaus, chief global strategist at BTIG LLC, wrote in emailed comments.

U.S. home prices climbed 0.4% in December to bring the year-on-year gain to 8.3%, the best advance since May 2006, CoreLogic reported Tuesday.

Stocks fell hard Monday on worries about Europe’s handling of its debt crisis, with Spain’s Mariano Rajoy facing calls from opposition leaders that he step down.

“Today’s rally is just as inexplicable as yesterday’s selloff,” Elliot Spar, market strategist at Stifel, Nicolaus & Co., emailed in afternoon comments.

Marketwatch