Is the M&A crowd trying to tell us something about equity valuations? Monday’s buyout-paced stock-market strength suggests an affirmative answer. The bad news is that it’s not easy to anticipate which stocks will next attract the dealmakers.
Here’s a solution: Look for stocks where a reasonable investment case can be made apart from buyout possibilities and where the math raises at least a reasonable inference that the market is pricing the business below some rational definition of fair value. We’ve attempted to do this with the list below.
The general investment case for each stock starts with its presence on at least one Reuters Select stock screen. Among the 600-plus stocks on that list, we sorted based on a score we calculated by ranking the companies under the following criteria:
- Short covering (weighted 5 times)
- Bullish analyst ratings (weighted 4 times)
- Trailing 12-Month Relative (company-to-industry) P/E (weighted 3 times)
- Relative (company-to-industry) 5-year sales growth rate (weighted 3 times)
- Relative (company-to-industry) 5-year return on investment (weighted 3 times)
- Favorable change in analyst rating, past 8 weeks (weighted 2 times)
We flagged those companies where shares are priced at least 10 percent below our back-of-the-envelope estimate of fair value (how much surplus pretax income we figure would be available to service debt issued by a hypothetical acquirer, assuming there would be in interest coverage ratio of 2.0.) Our list excludes foreign firms and energy companies. We also omitted situations where the valuation gap exceeds 100 percent, since these seem likely to be influenced by data oddities such as unusual factors impacting reported pretax earnings.
| Top-ranked Reuters Select asset-valuation plays | ||
| Company | Screen(s) | Estimated valuation gap (%) |
| PAR Technology Corp. (PTC) | Consensus Choices | 29 |
| Hospitality technology systems including hardware and software applications utilized at the point-of-sale, back of store and corporate office. | ||
| McGrath RentCorp (MGRC) | Income Stocks | 20 |
| Rental company with two products: relocatable modular buildings and electronic test equipment. | ||
| Sonic Automotive (SAH) | Favored Value Plays, Consensus Choices |
29 |
| Automotive retailer representing 37 different brands of cars and light trucks, and 38 collision repair centers in 15 states. | ||
| AllianceBernstein Holding LP (AB) | Lesser Known Stocks | 43 |
| Investment management and related services globally to institutional investors and individual investors (primarily by means of retail mutual funds sponsored by AllianceBernstein). | ||
| Whirlpool Corporation (WHR) | Fastest Turnover | 33 |
| Home appliances; laundry appliances, refrigerators and freezers, cooking appliances, dishwashers, room air-conditioning equipment, and mixers. | ||
| Oshkosh Truck (OSK) | Contrarian Opportunities | 20 |
| Commercial, fire and emergency, and military trucks. | ||
| Republic Airways (RJET) | Favored Value Plays | 42 |
| Provides its regional jet service for partners, operating as US Airways Express, AmericanConnection, Delta Connection or United Express. | ||
| Pacific Sunwear (PSUN) | Industry Leaders | 26 |
| Specialty retailer of everyday casual apparel, accessories and footwear designed for active teens and young adults. | ||
| Carolina Group (CG) | Relative Growth | 15 |
| Carolina Group is a group company of Loews Corporation that was designed for the purpose of holding a 100% interest in the tobacco subsidiary, Lorillard, Inc. Principal cigarette brand names of Lorillard are Newport, Kent, True, Maverick and Old Gold. | ||
| Overhill Farms (OFI) | Relative Values | 53 |
| Provides custom prepared foods to customers, such as Panda Restaurant Group, Inc., Jenny Craig, Inc., American Airlines, Inc., Safeway Inc. and Pinnacle Foods Corporation. | ||
Trackback