These 3 Stocks will Lead on M&A Activity: Goldman Sachs Group, Inc. (GS)

The year 2013 is quickly becoming the year of the merger and acquisition. Big players including Warren Buffett, General Electric Company (NYSE:GE), and Dell Inc. (NASDAQ:DELL) have played a part in deal making, setting the stage for bull markets in 2013.

Mergers and acquisitions are great for stocks. They bring higher stock prices and big buyout premiums over the recent trading price. Knowing which stocks are soon to get an M&A bid isn’t so easy, though.

How investors can bet on rising M&A

Publicly traded companies are flush with more than $1 trillion in cash. Interest rates are as low as they have ever been and despite all the hoopla about the economy, corporate profits aren’t slowing down any time soon.

With all the stars aligned, it makes sense for investors to start betting on growing deal activity. Here are three picks sure to get a boost as the deal-making pace picks up:

1). Goldman Sachs Group, Inc. (NYSE:GS) – Goldman Sachs is a leading investment bank and advisory firm, and the most true pure play on growing mergers and acquisitions. Although regulators have dampered the firm’s profitability – partly due to lower leverage and the loss of proprietary trading desks – Goldman Sachs remains a well capitalized investment bank trading for a 10% premium to book value with a forward earnings multiple of 10 times 2013 earnings. The bank is on track for double digit return on equity going forward with half as much leverage as it had prior to the financial crisis, making it a much safer bet in 2013 than it was in 2007.

2). Lazard Ltd (NYSE:LAZ)– This advisory and asset management firm is a quick up and comer in a space that is known to favor longevity and prestige. Lazard has won more new advisory contracts in big deals including InBev’s takeover of Grupo Modelo, T-Mobile’s merger with MetroPCS, and a Berkshire-led leveraged buyout of Heinz. The company is taking a hard look at compensation schemes, seeking to lower total compensation to boost shareholder returns. Lazard trades at just over 15 times forward earnings expectations, and 2.8 times revenues, giving the company significant leverage to increasing takeover activity and falling compensation expenses.

3). SPDR S&P Capital Markets ETF – Go full-circle and get paid to wait! This capital markets ETF holds major institutional firms including those involved in mergers and acquisitions, restructuring, brokerage, and asset management. The ETF holds 48 different U.S.-based companies with an average dividend yield of 3.37% and a price-to-book ratio of 1.6. This fund is a broad play on heightened M&A and rising security prices, with bull markets meaning better stock prices for every company in the fund.

Investors who align themselves to profit on rising deal-making stand to collect tidy profits as the thesis plays out. This is a trend that is only just beginning. So long as American businesses can raise long-term capital at rates half that just five years ago, the pace for deal-making will only remain elevated, much to the applause of investors who plan ahead.

Consider replacing positions in retail firms with shares of companies most levered to the fast-growing segment of banking: mergers and acquisitions.

The article These 3 Stocks will Lead on M&A Activity originally appeared on Fool.com and is written by Jordan Wathen.

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