Wednesday File: More Nuclear Mania Stories?

I’m posting most of our Friday File early this week, since a couple ideas have percolated to the top of my head.

The first was released as a Trade Note yesterday, and that was my thoughts about Brown & Brown’s (BRO) big recent acquisition… which led to purchasing more of that insurance brokerage firm.

And the second is a pair of nuclear “story stocks” that I think might attract some attention over the coming months, so might be a worthy speculation, for those who are interested in shorter-term trades… even though these trades are a bit out of character for me.

We’ll do the boring one first (sorry)…

This week we got big news from Brown & Brown (BRO), which is unusual — our favorite insurance brokerage is usually quite boring and quite steady, slowly generating cash flow (mostly by selling insurance policies and collecting commissions, though their business has extended from that to similar services). They are a dividend aristocrat, raising the dividend every year for decades, they use their free cash flow to make tuck-in acquisitions, and that grows the business and they keep compounding. But they have been slipping in some relatively large acquisitions along the way, including a couple larger purchases of European agency groups in the past few years, as the industry continues to consolidate — and this week, they made their largest acquisition ever, spending $9.8 billion (it will end up being roughly half cash, half equity) to acquire Accession, a brokerage that’s pretty similar to Brown & Brown in primarily serving middle-market companies and high-net-worth individuals, though with exposures to specific businesses and geographies that they say don’t have too much overlap with existing BRO businesses.

The bad news? More shares are being sold (and given to the Accession sellers) to fund the acquisition, so that theoretically dilutes the company. And they’re adding about $4 billion of debt to fund the rest, which roughly doubles their amount of long-term debt, and will therefore make the company a little bit more fragile if we happen to roll into a meaningful economic downturn. That doesn’t rise to the level of being a real concern, Brown’s balance sheet is fine and the debt should still be easily manageable, well below their maximum levels and likely to mean they maintain a good investment grade bond rating, but it is a big bite to …