In our research at billionairesportfolio.com, we have looked at every private equity and corporate takeover deal going back more than 15-years. In our analysis of that history, we have found over ten statistically significant and predictive factors for companies that tend to be acquired.
At a high level, if you want to try to find companies that may be takeover targets, you want to look at stocks in sectors where there have been a lot of recent and historical takeover activity. Of course, a company that has little or no debt, plus lots of cash flow is very attractive. And if you can find a stock that satisfies those factors and is trading near a 52-week low, you have a very viable candidate.
Based on recent buyout activity this year, no sector is hotter for takeovers than retail . Still, a number of retail stocks are selling near their 52-week low and many of these companies have little or no debt, and lots of cash flow.
Below is a list of retail companies we think could be acquired for a significant premium in the next three to six months:
1) Aeropostale (ARO) has already seen private equity interest. Sycamore Partners recently acquired almost 9% of Aeropostale a month ago. Sycamore Partners has a history of taking companies private at a significant premium. Based on past takeover multiples in the retail sector, we believe Aeropostale could be acquired for as much as $15 a share. That would be a 66% premium to its current share price.
2) American Eagle Outfitters AEO +1.02% (AEO) has zero debt and currently is selling at very low multiples, based on enterprise value-to-free cash flow and enterprise value-to-ebitda. The company has a very strong brand name and is currently selling very close to its 52 week low of $13.14. When you consider previous takeover multiples in the retail sector, the incredible amount of free cash flow American Eagle generates (over $400 million last year), and the fact that they have zero debt, almost any private equity company should be interested in this stock. According to analysts, American Eagle is worth at least $20 on a takeover or a 52% premium from its share price today.
3) Body Central BODY -2.03% (BODY) is a retail company that focuses on young women’s apparel and accessories with stores located mostly in the east coast and south. The company has zero debt, a market cap of only $85 million and is selling right at its 52 week low of $5.15 (the stock price is currently $5.19). Based on previous takeover multiples in the retail sector analysts at Jeffries believe Body Central is worth more than $8 a shares on a buyout or a 54% premium from its share price today.
4) Francesca’s Holding Corp. (FRAN) is another female based accessory and clothing store with locations throughout the United States. The stock has zero debt and is currently selling near its 52-week low of $16.49 (the stock price is currently $17.08). Based on previous takeover multiples in the retail sector Francesca’s could be worth more than $26 on a takeover, or a 52% premium from its current share price.
Average investors make a lot of mistakes. Among those mistakes, they spend so much time worrying about complex stock picking issues and unrealistic “win rates.” They ignore the very simple things that are fundamental to investing. Perhaps the biggest mistake investors make is ignoring the concept of diversification.
Now, I’m not talking about adding gold or Chinese stocks to your portfolio. A basic, yet powerful diversification tool is position sizing. Most people blindly buy a fixed amount of shares of a stock, regardless of the price of the stock, regardless of the volatility of the stock.
An easy way to position size is to give each holding an equal chance to perform for you. This means for
each position you buy, you allocate the same amount of money.
Let’s look at a simple example: Assume I have a $100,000 account with a portfolio of 20 stocks … if TEN of my stocks over the next year do nothing (trade sideways), SIX stocks go up an average of 30%, TWO stocks go up an average of 150%, ONE stock drops 50% and another stock goes to zero (a 100% loss).
Would you consider that a success or failure?
My guess is most average investors would consider it a failure. They held ten stocks that didn’t go up. One went to zero.
My take: If you could replicate the performance of that portfolio, year-in and year-out, over your entire you life you would be the best investor in the history of the world. And your wealth accumulation (just on compounding that initially $100k over a lifetime) would land you in the top 1/10th of 1% of the wealthiest people in the world.
So, let’s do the math on the above portfolio scenario.
On a $100,000 account 20 stocks equal weighted would mean that you would invest $5000 on each stock. So TEN stocks that went up zero would still be worth $50,000. The SIX stocks that went up on average of 30% would now be worth $39,000 (on $30,000 originally invested). The TWO stocks that went up 150% on average would now be worth $25,000 (on $10,000 originally invested). The one stock that dropped in half would be worth $2500 (on $5,000 originally invested), and the one stock that went down 100% would be worth zero ($5,000 loss).
Okay, so let’s add these values: $50,000 + $39,000 + $25,000 + $2500 +0 = $116,500
Our $100,000 portfolio is now we worth $116,500. That is a 16.5% annual return. That’s double the average historical return of the S&P 500. And a 16.5% annualized return, compounded on a $100,000 initial investment, goes to $177 million in 50 years.
So now you see the value of diversifying. And the easy way to get diversification is through position sizing.
Put simply: It increases your odds of making money. And making money is THE PRIMARY GOAL in investing.
10/7/13
In past weeks, I’ve talked about some simple, yet powerful screens we run at billionairesportfolio.com
The goal for all of our screens is to identify stocks where the potential reward greatly outweighs the risk, or stocks that have an asymmetrical reward to the risk taken. Finding stocks with these characteristics is the genesis of deep value investing. This is also a key criteria we utilize at the billionairesportfolio.com.
In addition to searching through SEC filings for investors that are building controlling interests in companies, we like to run a series screens to try and find stocks that have a 100% to 200% potential upside combined with limited downside risk.
Here’s another example of one of the top screens we use:
First, we look for companies with a market capitalization greater than $25 million. For the second level of the screen, the companies much have more than three analysts covering the stock. Third, there has to be more than three analysts that have a price target on the stock. Finally, we want to find stocks that are trading at a huge discount to analyst consensus price targets.
Anyone that has worked at a hedge fund or mutual fund knows that Wall Street analysts move stocks. Stocks that have consensus analyst price targets well above their current share price, have strong sentiment and Wall Street sponsorship which usually pushes these stocks higher in the short term.
In running this screen for this this week in October, the following five stocks have hit our radar as high potential, deep value candidates. These stocks have an average analyst price target that is at least 200% higher than its current share price.
1) Ceres Inc. (CERE) has a current share price $1.46. The consensus analyst target price is $5.67. That gives us a “street projected return” of 288%.
2) GSE Holding Inc. (GSE) has a current share price $2.10. The consensus analyst target price is $6.40. That gives us a “street projected return” of 205%.
3) Kior Inc. (KIOR) has a current share price of $2.32. The consensus analyst target price is $7.10. That gives us a “street projected return” of 206%.
4) Echo Therapeutics (ECTE) has a current share price $2.55. The consensus analyst target price is $9.33. That gives us a “street projected return” of 266%.
5) Immunocellular (IMUC) has a current share price $2.67. The consensus analyst target price is $10.25.
That gives us a “street projected return” of 284%.
This gives us a great starting point to identify a stock that may be deeply undervalued coupled with strong Wall Street sponsorship and sentiment.
On Monday Blackberry’s biggest shareholder, Fairfax Financial , announced a bid of $9 a share to take the company private. This is not the end of the Blackberry saga, it’s likely just the beginning.
Of course, the investor behind Fairfax is Prem Watsa. Watsa’s Fairfax owns around 10% of BBRY at much higher prices, roughly $17 per share.
With an official bid now on the table, and a November 4 deadline, Watsa’s bid creates a virtually risk-free trade for other influential investors to enter the trade. By stepping in today, an activist investor or group would have a floor in Watsa’s bid, and the power to influence shareholders to fight for a higher price for their shares.
Moreover, we have 42 days to see if another buyer, with a better bid, will come to the table. In Blackberry, we have the real opportunity for a bidding war. An activist investor that enters Blackberry may find himself owning shares in a company with an implicit floor, while composing a bidding war.
Are there challenges associated with Canada’s takeover laws. Yes. Will that mean one of the world’s best technology providers in the cell phone/mobile computing space quietly goes away for half of its book value? Unlikely.
Back in 2011, there was a company by the name of America Online. AOL AOL -0.51% too was considered a rapidly dying business. It was hated by and poorly understood by analysts. But it had a fantastic balance sheet, and valuable patents and technologies. Starboard Value stepped in and acquired a huge position in AOL. They forced the company to sell its valuable patents and technology. In doing this they created instant value for the shareholders. AOL’s stock price went from a low of $10 in August of 2011 to over $40 in April of 2013.
Blackberry is a stock with about $5 in cash per share with zero debt. The company, according to a consensus of analysts has anywhere from $8 to $10 worth of patents and technology. Regardless of the synergistic value creation that those patents and technology could mean for another big mobile player (Apple AAPL -1.46%, Samsung, Microsoft MSFT -1.02% …) Blackberry is still selling for a substantial discount to its break-up value.
We may see three potential outcomes for Blackberry, with the involvement of an activist investor entering this situation:
Scenario 1 – Mr. Watsa has supplied a floor from which an activist investor can negotiate from on behalf of shareholders. The result: Virtually no risk and a potential premium to Watsa’s bid won for shareholders.
Scenario 2 – With an approaching November deadline and a bid on the table from Watsa, a rapidly evolving bidding war could ensue for the coveted Blackberry technology.
Scenario 3 – An activist investor could block Watsa, force the sale of Blackberry’s most valuable assets, and then force management to pay out a one-time special dividend to its shareholders.
Bottom line: With a takeover bid in place, Blackberry offers a very attractive asymmetric risk/return profile. The stock is just in need of at least one influential investor to fight for the highest value for shareholders in a Blackberry sale.
Consider this: Comparing a Blackberry outcome to the AOL outcome (where Starboard Value forced the company to sell patents and change its strategy), Blackberry could be worth anywhere from $21 to $25 a share.
Another interesting comparable: Dell.
According to Bloomberg, when Dell was taken private by Michael Dell and Silver Lake Partners, at under 6 times its EBITDA for the prior 12 months. The valuation ranked as the lowest multiple ever paid in a buyout of a technology company for more than $1 billion.
At $9 per share, BBRY would be valued at just 1.3 times EBITDA – a quarter of the cheapest takeover in the history of billion dollar+ tech takeovers.
At BillionairesPortfolio.com, I am always looking for deep value stocks that are owned by some of the world’s top hedge funds and billionaire investors.
Nothing represents a great value play more than a stock that is trading below the cash it holds on its books.
A stock that is trading “below cash” means the company has more cash on its balance sheet than its entire market capitalization. As billionaire hedge fund David Tepper put it “buying cash for less than cash” is one of the easiest ways to make money in the stock market.
Here are five stocks that top hedge funds own that are also trading below cash:
1) STR Holdings, Inc. has $1.74 per share in cash and has zero debt. The stocks sells for only $1.72. Top hedge fund Red Mountain Capital Partners owns nearly 15% of this stock.
2) Career Education Corporation has $3.44 in cash per share and zero debt. The stocks sells for $2.66. Blum Capital Partners, a top hedge fund/private equity firm, owns almost 14% of this stock.
3) AVEO Pharmaceuticals AVEO +0.96%, Inc. has $3.04 per share in cash and has zero debt. The stock sells for only $2.09. Billionaire and legendary hedge fund manager, Seth Klarman of the Baupost Group owns more than 7% of this stock.
4) The First Marblehead Corporation has $1.23 per share in cash and has zero debt. The stock sells for just $0.85. Value-based hedge fund Mangrove Partners owns almost of 10% of this stock.
5) Savient Pharmaceuticals, Inc. has $0.71 per share in cash and has zero debt. The stock sells for only $0.62 cents. Top biotech hedge fund Palo Alto Investors owns more than 13% of this stock.
Disclosure: Clients of Billionaire’s Portfolio, own shares of STR Holdings (STRI)
I am writing you to respectfully recommend an investment opportunity that I think well suits your respective investment styles.
The stock is Blackberry. As you know Blackberry has put itself on the block and has given a deadline to sell itself.
And as you know, Blackberry has an influential investor involved, Prem Watsa, an investor that owns shares at much higher prices (roughly $17/share).
Now, Mr. Watsa is in position to take this company private. And that creates opportunity. Given the deadline Blackberry has self-imposed, if/when Mr. Watsa makes a public bid to take Blackberry private, this will create a virtually risk-free trade for other influential investors to enter the trade.
You will have a floor, in Watsa’s bid, and the power to influence shareholders to force that bid higher.
Moreover, as the November date approaches, the opportunity for a bidding war grows. You may find yourself owning shares in a company with an implicit floor, while composing a bidding war.
Are there challenges associated with Canada’s takeover laws. Yes. Will that mean one of the world’s best technology providers in the cell phone/mobile computing space quietly goes away for book value? Unlikely.
Mr. Smith, I recall you 2011 investment in AOL. AOL was considered a rapidly dying business. It was hated by and poorly understood by analysts. Sound familiar. But it had a fantastic balance sheet, and valuable patents and technologies. Your firm acquired a huge position in AOL in 2011, and instantly forced the company to sell its valuable patents and technology. In doing this you created instant value for the shareholders. AOL’s stock price went from a low of $10 in August of 2011 to over $40 in April of 2013.
Blackberry is a stock with $5.50 in cash per share with zero debt. The company, according to a consensus of analysts has anywhere from $8 to $10 worth of patents and technology. Regardless of the synergistic value creation that those patents and technology could mean for another big mobile player (Apple, Samsung …) Blackberry is still selling for a nice discount to its break-up value.
So I see three potential outcomes for Blackberry, with your involvement:
Scenario 1 – Mr. Watsa tries to take the company private. That supplies a floor from which to negotiate from on behalf of shareholders. The result: Virtually no risk and a potential premium to Watsa’s bid won for shareholders.
Scenario 2 – With an approaching deadline and a bid on the table from Prem Watsa, a rapidly evolving bidding war could ensue for the coveted Blackberry technology.
Scenario 3 – Force the sale of Blackberry most valuable assets and then force management to buy back stock or pay out a one-time special dividend to its shareholders.
Bottom line: Blackberry offers a very attractive asymmetric risk/return profile. And the stock is in need of at least one influential investor to demand the highest value for shareholders in a Blackberry sale.
On a parting note, comparing a Blackberry outcome to the AOL outcome (where Starboard Value forced the company to sell patents and change its strategy), Blackberry could be worth anywhere from $21 to $25 a share. Perhaps most intriguing, given the potential scenarios and the approaching November deadline, a large premium in Blackberry shares could come in just a few short months.
Respectfully,
Will Meade
President of The Billionaires Portfolio
As I mentioned last week, as part of our research process for our online platform, billionairesportfolio.com, we look for investment ideas using a series of simple, yet powerful, screens.
The goal is to identify stocks where the potential reward greatly outweighs the risk. Finding stocks with asymmetrical risk/reward is at the core of activist investing — it’s a characteristic represented in every one of our picks in our premium research service, the Billionaire’s Portfolio. If you want to find yourself on the right side of big winners, if you want to own the stocks that show up on the news at night after doubling or tripling on the day, you need to focus on this risk/reward relationship in your stock selection.
Among the many screens we run through our research process, we like finding stocks that are trading at a huge discount to analyst consensus price targets. These are stocks that have consensus analyst price targets well above their current share price, that have strong sentiment and Wall Street sponsorship. That can prove to uncover deep value investment opportunities. In using this screen, we tend to “back into” finding the presence of a an influential investors, already involved in the stock.
Now, given the backdrop I’ve described, the following five stocks have recently hit our radar as high potential, deep value candidates. These stocks have an average analyst price target that is at least 100% higher than its current share price.
1) Emcore Corporation (EMKR) has a current share price $4.29. The consensus analyst target price is $8.63. That gives us a “street projected return” of 101%.
2) Global Geophysical Services (GGS) has a current share price $2.55. The consensus analyst target price is $5.57. That gives us a “street projected return” of 122%.
3) Uni-Pixel Inc. (UNXL) has a current share price $18.12. The consensus analyst target price is $45.26 That gives us a “street projected return” of 150%.
4) Virnetx Holding (VHX) has a current share price $19.74. The consensus analyst target price is $46.67. That gives us a “street projected return” of 136%.
5)Wi-Lan Inc. (WILN) has a current share price of $3.26. The consensus analyst target price is $6.57. That gives us a “street projected return” of 101%.
This gives us a great starting point to identify stocks that may be deeply undervalued, with the potential to be the next big winner that dominates financial news headlines.
Will Meade
President of The Billionaires Portfolio
Every week I like to run a scan for stocks that are selling at a huge discount to analyst consensus price targets. I use the following parameters for my screen:
1) Market Cap has to be greater than $100 Million.
2) There has to be more than three analysts covering the stock.
3) There has to be more than three analysts that have a price target on the stock.
The following four stocks have an average analyst price target that is greater than or equal to 200% higher than its current share price. Here they are:
1) Immunocellar, Symbol (IMUC) has a current share price $2.78. Consensus analyst target price is $10.25. Projected return 268%.
2) Merrimack Pharmaceuticals Inc, Symbol (MACK) has a current share price $3.47. Consensus analyst target price is $12.00. Projected return 245%.
3) Threshold Pharmaceuticals Inc, Symbol (THLD) has a current share price $4.37. Consensus analyst target price is $13.50. Projected return 208%.
4) OncoGenex Pharmaceuticals Inc, Symbol (OGXI) has a current share price $8.88. Consensus analyst target price is $26.90. Projected return 202%.
One of the best indicators to find stocks that can break out quickly is short interest as a percentage of Float. Short interest as a percentage of float is the number of shorted shares divided by the float (the float is the total number of shares publicly owned and available for trading). Basically stocks that have a high percentage of their shares being sold short are ripe for a “Short Squeeze.”
A “Short Squeeze” occurs when short sellers are forced to cover their shares when a stock moves against them abruptly. This causes sellers to panic, and if they are leveraged they can be forced to cover their shares. Either way it creates instant buying in a stock.
A lot of traders look at a high short interest as a percentage of float as rocket fuel, because they know these types of stocks have built in buyers due to all the short sellers that might have to cover on abrupt move.
Yet looking at just short interest as a percentage of float can be dangerous, because the so called “smart money” hedge funds are usually the ones who sell stocks short. And they will not sell a stock short unless they believe there is a major fundamental reason for why the stock will go down.
But by combing momentum with a high short interest as a percentage of float, you are testing the will of the short seller, and how much pain they can take being short the stock when it is going against them and they are losing money. If their losses become too big eventually they will throw in the towel and this will cause the stock to breakout in a big way.
Here is a list of the top 3 stocks with the highest short interest as a percentage of float and with the best momentum. These stocks have been outpacing the market, and causing pain to the investors shorting these stocks. So eventually, you could see a short squeeze and a big move up in these stocks.
1) ITT Educational Service Inc. (ESI), this stock has an amazing 57.6% of its float short, yet the stock is up more than 100% over the last 5 months.
2) Radioshack Corporation (RSH), Radioshack has almost 40% of its float short, yet the stock is up more than 30% this month alone, and it has just broken out of a huge channel formation as well.
3) Miller Energy Resources (MILL) Miller has 35% or more than a 1/3 of its float short and the stock is up more than 50% since April.
As we complete our first rolling twelve month period, today, I want to give a brief summary of our performance.
Since inception (August 2012), our portfolio is up 35.7% versus 15.5% in the S&P 500. This includes a long period where we held a significant amount of cash, as we were building the portfolio. For every $20,000 invested our picks have produced gains of $7,131.
We became fully invested in June. And that’s when we have truly been able to show the power of our process.
Since June 1, the portfolio is up 20.1% versus 4.5% in the S&P 500.
What about today? Today, stocks, yields and the dollar has a technical sell-off. And predictably, the media and Wall Street salesmen are licking their chops — going to their wheel-house of scary market conjecture.
Our Billionaire’s Portfolio lost 1/8 of 1%. Meanwhile, the S&P lost over 1.5%.
This is what real investing is about. It’s not about picking up tips and clues from watching heavily made-up egotists on CNBC all day. It’s about investing in stocks where there is a clear catalyst at work and pent-up value. And we only do so when we have a very rich, powerful partner on our side, that owns enough stock and has enough influence to control his own destiny. When he wins. We win.
This is how you make money consistently in the stock market. This is what “absolute return” investing is all about. It doesn’t matter what the stock market is doing. When value in a company is unlocked, the stock goes up! This week was a very good example. When stocks were down for a second consecutive day, one of the picks in our portfolio, jumped over 30%. And today, stocks break-down, our portfolio holds firm.
If you are reading my blog. You have found the right place. Join me. Stop giving your money to uneducated brokers and untalented mutual fund managers. To subscribe to The Billionaires Portfolio please click here.
Will Meade
President of The Billionaires Portfolio
