On March 9th, we sent a note to our clients a note entitled, “Eye on Value: Companies Trading at Discount to Cash”. Since that time the screen in aggregate has returned ~34%, with Eastman Kodak being the top performer at +~94%.
Not surprisingly given the move in the market over that period, every stock in the screen registered a positive return. To quote Keith indirectly, our screen was either good, or lucky, as it outperformed the market by over 1,000 basis points.
We ran a new screen today, which we have called, “Tech Spec”. Our Head of Technology research, Rebecca Runkle, wrote today in her morning piece, “M&A is what matters now.” In effect, she is looking at the IBM / Sun deal as an early indicator of the re-emergence of tech M&A. While Rebecca would obviously offer a more nuanced view of what company is next to be taken out, probably focusing on the franchise value of the company and such; we macro guys are simple folk.
As a result, I put together a tech spec screen based on the following parameters: cheap, good balance sheet, and market capitalization south of $1.0BN. Since tech is working and M&A in tech is likely to pick up on a y-o-y basis, especially since, as Rebecca also wrote, “bid-ask spreads have already collapsed (0.9 TTM sales versus 1.9 a year ago, according to The 451 Group)”, this seems like the good area to look for some beta and to play the potential thematic increase in technology M&A.
According to Capital IQ, the group on average trades at less than 4.0x EV/EBITDA, less than 1.0 FV / Sales, and all the companies have net cash balance sheets. Value investor’s values, to be sure. Incidentally, all of these companies fell under Capital IQ’s technology classification.
Daryl G. Jones