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INVESTING IDEAS - page 55

Discover and validate investing ideas with valuation models and charts.

A Detailed Look Inside Jeremy Grantham’s Stock Portfolio

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A review of Grantham Mayo Van Otterloo’s stock portfolio whose largest holdings include Microsoft Corporation (Nasdaq: MSFT), Apple Inc. (Nasdaq: AAPL), and Oracle Corporation (NYSE: ORCL).


Reversion To The Mean

Jeremy Grantham is the co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo, more commonly known as GMO. He is best known for his quarterly newsletters and for popularizing the ‘reversion to the mean’ concept in investing. He has also predicted key turning points in market indices and was listed by Bloomberg Magazine as one of the 50 most influential people in global finance.

Mean reversion, as employed by GMO, is similar to value investing. The difference is that where conventional value investors use company-specific fundamental data to assess valuations, GMO uses history as a guide.

Grantham and the GMO team spend a lot of time analyzing stock market valuations and bubbles throughout history. They use long-term valuation trends to calculate what they believe to be the fair value of an asset. They then invest in assets that have moved a long way below fair value.

Grantham believes strongly that history repeats itself and that every bubble eventually bursts. He used his knowledge of bubbles to predict the dotcom bubble in 2000 and the housing bubble in 2007. He also managed to get his clients out of Japanese equities when they peaked in the late 1980s.

The nature of Grantham’s approach is that GMO tends to underperform during bull markets and then outperform when markets correct. Unsurprisingly, over the past few years, the firm’s funds have underperformed many of their peers. As a result, the firm’s clients have reportedly withdrawn $40 billion since 2014.


Grantham Mayo Van Otterloo’s Latest Form 13F Filing

On February 14th, Jeremy Grantham’s firm Grantham Mayo Van Otterloo filed its quarterly Form 13F regulatory filing. I reviewed the filing to gain a glimpse into the firm’s large portfolio.

Grantham Mayo Van Otterloo’s stock portfolio totals $17.0 billion according to the latest filing. The list value of stock holdings is down -0.9% when compared to the last quarter. As a benchmark, the S&P 500 was up 6.1% over the same period.

Quarter-over-Quarter Turnover (QoQ Turnover) measures the level of trading activity in a portfolio. Grantham Mayo Van Otterloo’s QoQ Turnover for the latest quarter was 13.7%, so the firm appears to trade a significant percent of its portfolio each quarter.


Grantham Mayo Van Otterloo’s Largest Holdings

The Ideas section of finbox.io tracks top investors and trending investment themes. You can get the latest data on the holdings discussed below at the Grantham Mayo Van Otterloo page. The following table summarizes the firm’s largest holdings reported in the last filing:

Grantham Mayo Van Otterloo Largest Holdings
Ticker Name Holding ($mil) % Of Portfolio
MSFT MICROSOFT CORP $840.1 5.0%
AAPL APPLE INC $730.5 4.3%
ORCL ORACLE CORP $698.7 4.1%
JNJ JOHNSON & JOHNSON $603.5 3.6%
UNH UNITEDHEALTH GROUP INC $586.4 3.5%
GOOG ALPHABET INC $461.7 2.7%
QCOM QUALCOMM INC $386.2 2.3%

The seven positions above represent 25.4% of the fund’s total portfolio. Microsoft Corporation (Nasdaq: MSFT) is its largest holding with a long position in the company worth $840.1 million.

Apple Inc. (Nasdaq: AAPL) is Jeremy Grantham’s second largest position and represents 4.3% of his firm’s total portfolio.


Grantham Mayo Van Otterloo’s 7 Largest Purchases

I also used finbox.io to find Grantham Mayo Van Otterloo’s largest buys last quarter. Here’s the list of the biggest stock purchases determined by comparing the last two filings:

Grantham Mayo Van Otterloo 7 Largest Purchases
Ticker Name Purchased ($mil) % Of Portfolio
EWY ISHARES INC $187.0 1.1%
TJX TJX COS INC NEW $179.0 1.4%
TWX TIME WARNER INC $168.8 1.8%
CTL CENTURYLINK INC $65.5 0.8%
AET AETNA INC NEW $55.7 0.3%
WB WEIBO CORP $50.3 0.4%
ORCL ORACLE CORP $45.0 4.1%

The largest purchase for the quarter was iShares MSCI South Korea ETF (ARCX: EWY). Grantham Mayo Van Otterloo purchased a new $187 million position in the ETF and now represents 1.1% of the firm’s portfolio.

The largest stock purchase was TJX Companies, Inc. (NYSE: TJX). The investment manager increased its position in the company by $179.0 million with the stock now representing 1.4% of the firm’s portfolio.


Grantham Mayo Van Otterloo’s Best 1-Month Performance Stocks

To find stocks in the firm’s portfolio that may be popular at the moment or have tailwinds moving forward, I ranked the firm’s holdings by price appreciation. The ranking table below lists the stocks in Grantham Mayo Van Otterloo’s portfolio by stock price performance over the last 30 days.

Grantham Mayo Van Otterloo Best 1-Month Performance Stocks
Ticker Name Price 1-mo Ago Current Price % Change 1-mo
SEDG SOLAREDGE TECHNOLOGIES INC $32.20 $52.08 61.7%
MU MICRON TECHNOLOGY INC $40.41 $55.22 36.6%
CHUBK COMMERCEHUB INC $17.39 $22.39 28.8%
LRCX LAM RESEARCH CORP $165.47 $212.74 28.6%
AMAT APPLIED MATLS INC $48.00 $59.37 23.7%
CHUBA COMMERCEHUB INC $18.13 $22.40 23.6%
TAL TAL ED GROUP $30.46 $37.44 22.9%

Shares of SolarEdge Technologies, Inc. (Nasdaq: SEDG) have increased by 61.7% over the last month. Investors may want to take a closer look at the stock, especially with ‘smart money’ backing it.


Grantham Mayo Van Otterloo’s Recent Price Pull-Back Stocks

To find stocks in the firm’s portfolio that may be unpopular at the moment and trading at cheap valuations, I ranked the firm’s holdings by price pullbacks. The ranking table below lists the stocks in Grantham Mayo Van Otterloo’s portfolio by stock price performance over the last 30 days.

Grantham Mayo Van Otterloo Recent Price Pull-Back Stocks
Ticker Name Price 1-mo Ago Current Price % Change 1-mo
WMT WAL-MART STORES INC $99.37 $87.92 -11.5%
GM GENERAL MTRS CO $41.46 $37.84 -8.7%
VFC V F CORP $79.32 $72.80 -8.2%
SQM SOCIEDAD QUIMICA MINERA DE C $54.16 $50.26 -7.2%
W WAYFAIR INC $90.68 $85.37 -5.9%
HRG HRG GROUP INC $16.29 $15.51 -4.8%
CHL CHINA MOBILE LIMITED $47.99 $46.01 -4.1%

Wal-Mart Stores, Inc. (NYSE: WMT) stock price has fallen by -11.5% over the last month. It may be worth taking a closer look at the stock, especially after this recent decline.


Grantham Mayo Van Otterloo’s 7 Best Piotroski Score Stocks

The Piotroski Score is a stock score developed by Stanford accounting professor Joseph Piotroski. He developed a set of rules to find companies with strong liquid balance sheets, increasing profitability, and operating efficiency. He proposed screening for stocks based on a checklist that awards one point for each matched criterion. The strategy generated 23% annual return between 1976 and 1996, 7.5% higher than what the S&P 500 posted over the same period.

The stocks listed in the table below have the best Piotroski Scores. When two stocks have the same score, the larger holding is ranked higher.

Grantham Mayo Van Otterloo 7 Best Piotroski Score Stocks
Ticker Name Piotroski Score % Of Portfolio
TXN TEXAS INSTRS INC 9 1.3%
SQM SOCIEDAD QUIMICA MINERA DE C 9 0.1%
ANTM ANTHEM INC 8 1.3%
MBT MOBILE TELESYSTEMS PJSC 8 0.9%
MU MICRON TECHNOLOGY INC 8 0.2%
AMAT APPLIED MATLS INC 8 0.2%
VALE VALE S A 8 0.1%

Investors interested in learning more about the Piotroski Screen should read how the strategy returned +90% in 2017.

Managers with more than $100 million in qualifying assets under management are required to disclose their holdings to the SEC each quarter via 13F filings. Qualifying assets include long positions in U.S. equities and ADRs, call/put options, and convertible debt securities. Shorts, cash positions, foreign investments and other assets are not included. It is important to note that these filings are due 45 days after the quarter end date. Therefore, Grantham Mayo Van Otterloo’s holdings above represent positions held as of December 31st and not necessarily reflective of the fund’s current stock holdings.

However, most can agree that with thousands of stocks traded on U.S. exchanges, doing thorough research on each one is nearly impossible for smaller investors. Leveraging the resources of the largest hedge funds on Wall Street can be a powerful way to narrow down the list.


Author: Brian Dentino

Expertise: financial technology, analyzing market trends

Brian is a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to research stock fundamentals. Brian’s background is in physics & computer science and previously worked as a software engineer at GE Healthcare. He enjoys applying his expertise in technology to help find market trends that impact investors.

Brian can be reached at brian@finbox.io.

As of this writing, Brian did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

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Source: finbox.io mavericks analysis
A Detailed Look Inside Jeremy Grantham’s Stock Portfolio

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

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Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

With the stock up roughly 30% in the last three months, investors may be tempted to sell their shares of Micron Technology, Inc. (NASDAQ: MU). In this article, I am going to calculate the fair value of Micron Technology by forecasting its future cash flows and discounting them back to today’s value. Value investors may find the results from my analysis surprising.


DCF Methodology

The basic philosophy behind a DCF analysis is that the intrinsic value of a company is equal to the future cash flows of that company, discounted back to present value. The general formula is provided below. The intrinsic value is considered the actual value or “true value” of an asset based on an individual’s underlying expectations and assumptions.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

Cash flows into the firm in the form of revenue as the company sells its products and services, and cash flows out as it pays its cash operating expenses such as salaries or taxes (taxes are part of the definition for cash operating expenses for purposes of defining free cash flow, even though taxes aren’t generally considered a part of operating income). With the leftover cash, the firm will make short-term net investments in working capital (an example would be inventory and receivables) and longer-term investments in property, plant and equipment. The cash that remains is available to pay out to the firm’s investors: bondholders and common shareholders.

I will take you through my own expectations for Micron Technology as well as explain how I arrived at certain assumptions. The full analysis was completed on Thursday, March 8th. An updated analysis using real-time data can be viewed in your web browser at finbox.io’s Micron Technology DCF analysis page. The steps involved in the valuation are:

1. Forecast Free Cash Flows
  • Create a revenue forecast
  • Forecast EBITDA profit margin
  • Calculate free cash flow
2. Select a discount rate
3. Estimate a terminal value
4. Calculate the equity value

Step 1: Forecast Free Cash Flows

The key assumptions that have the greatest impact on cash flow projections are typically related to growth, profit margin and investments in the business. The analysis starts at the top of the income statement by creating a forecast for revenue and then works its way down to net operating profit after tax (NOPAT), as shown below.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

From NOPAT, deduct cash outflows like capital expenditures and investments in net working capital and add back non-cash expenses from the income statement such as depreciation and amortization to calculate the unlevered free cash flow forecast (shown above).

Create A Revenue Forecast

When available, the finbox.io’s pre-built models use analyst forecasts as the starting assumptions. To forecast revenue, analysts gather data about the company, its customers and the state of the industry. I typically review the analysts’ forecast and modify the growth rates based on historical performance, news and other insights gathered from competitors.

Analysts covering the stock often compare the company to a peer group that includes Amkor Technology (Nasdaq: AMKR), Amtech Systems (Nasdaq: ASYS), Integrated Device Technology (Nasdaq: IDTI) and NXP Semiconductors (Nasdaq: NXPI).

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

The company’s 5-year revenue CAGR of 19.8% is above all of its selected comparable public companies: AMKR (7.0%), ASYS (15.1%), IDTI (6.7%) and NXPI (17.8%).

As highlighted below, Micron Technology’s revenue growth has ranged from -23.4% to 80.3% over the last five fiscal years.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

Going forward, analysts forecast that Micron Technology’s total revenue will reach $27,619 million by fiscal year 2022 representing a five-year CAGR of 6.3%.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

Forecast Micron Technology’s EBITDA Profit Margin

The next step is to forecast the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Note that EBITDA is a commonly used metric in valuation models because it provides a cleaner picture of overall profitability, especially when benchmarking against comparable companies. This is because it ignores non-operating costs that can be affected by certain items such as a company’s financing decisions or political jurisdictions. For more detail, see Micron Technology’s EBITDA definition.

EBITDA margin is calculated by dividing EBITDA by revenue. The higher the EBITDA margin, the smaller the firm’s operating expenses are in relation to its revenue, which may ultimately lead to higher profit. Lower operating expenses for a given level of revenue can be a sign of internal economies of scale.

The charts below compare Micron Technology’s LTM EBITDA margin to the same peer group. The company’s EBITDA margin of 55.7% is, again, above all of its selected comparable public companies: AMKR (24.5%), ASYS (9.9%), IDTI (23.7%) and NXPI (45.7%).

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

Wall Street analysts are forecasting that Micron Technology’s EBITDA margin will actually fall to 52.0% by fiscal year 2022, representing a decrease of -3.8% from its LTM EBITDA margin of 55.7%.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

I won’t specifically walk through my assumptions here, but I then forecasted depreciation & amortization, capital expenditures and net working capital based on historical levels.

Calculate Free Cash Flow

With all required forecasts in place, the next step is to calculate projected free cash flow as shown below.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)


Step 2: Select Micron Technology’s Discount Rate

The next step is to select a discount rate to calculate the present value of the forecasted free cash flows. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate. Generally, a company’s assets are financed by either debt (debt is after tax in the formula) or equity. WACC is the average return expected by these capital providers, each weighted by respective usage. The WACC is the required return on the firm’s assets.

It’s important to note that the WACC is the appropriate discount rate to use because this analysis calculates the free cash flow available to Micron Technology’s bondholders and common shareholders. On the other hand, the cost of equity would be the appropriate discount rate if we were calculating cash flows available only to Micron Technology’s common shareholders (i.e., dividend discount model, equity DCF). This is commonly referred to as the difference between free cash flow to equity (FCFE) and free cash flow to the firm (FCFF). By using the WACC to discount FCFF, we are calculating total firm value. If we discounted FCFE at the required return on equity, we would end up with equity value of the firm. Equity value of the firm is simply total firm value minus the market value of debt.

I determined a reasonable WACC estimate for Micron Technology to be 10.5% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s Micron Technology WACC Model Page. The DCF model then does the heavy lifting of calculating the discount factors by applying the mid-year convention technique.


Step 3: Estimate Micron Technology’s Terminal Value

Since it is not reasonable to expect that Micron Technology will cease its operations at the end of the five-year forecast period, we must estimate the company’s continuing value, or terminal value. Terminal value is an important part of the DCF model because it accounts for the largest percentage of the calculated present value of the firm. If you were to exclude the terminal value, you would be excluding all the future cash flow past the horizon period. Using finbox.io, users can choose a five-year or 10-year horizon period to forecast future free cash flow.

The most generally accepted techniques to calculate a terminal value are by applying the Gordon growth approach, using an EBITDA exit multiple and using a revenue exit multiple. This analysis applies the Gordon growth formula:

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

As the formula suggests, we need to estimate a “perpetuity” growth rate at which we expect Micron Technology’s free cash flows to grow forever. Most analysts suggest that a reasonable rate is typically between the historical inflation rate of 2% to 3% and the historical GDP growth rate of 4% to 5%.

Micron Technology’s free cash flows are not growing at the end of the projection period, so I’ve conservatively selected a perpetuity growth rate of 0% (at the midpoint).

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

An EBITDA multiple is calculated by dividing enterprise value by EBITDA. Similarly, the terminal EBITDA multiple implied from a DCF analysis is calculated by dividing the terminal value by the terminal year’s projected EBITDA. Comparing the terminal EBITDA multiple implied from the selected growth rate to benchmark multiples can serve as a useful check.

Micron Technology’s implied EBITDA multiple of 5.6x seems reasonable based on its current multiple of 5.0x. This is also still well below the benchmark and sector LTM EBITDA multiple.


Step 4: Calculate Micron Technology’s Equity Value

The enterprise value previously calculated is a measure of the company’s total value. An equity waterfall is a term often used by valuation firms, referring to the trickle-down process of computing a company’s equity value from its enterprise value. Note that in the event of a bankruptcy, debt holders will be paid in full before anything is distributed to common shareholders. Therefore, we must subtract debt and other financial obligations to determine a firm’s equity value. The general formula for calculating equity value is illustrated in the figure below.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

The model uses the formula shown above to calculate equity value and divides the result by the shares outstanding to compute intrinsic value per share as shown at the bottom of the figure below.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

The assumptions I used in the model imply an intrinsic value per share range of $64.83 to $74.10 for Micron Technology.

Micron Technology’s stock price last traded at $55.24 as of Thursday, March 8th, 22.9% below my midpoint value of $67.93.


Conclusion: Micron Technology Still Has Upside Potential

A DCF analysis can seem complex at first, but it’s worth adding to your investment analysis toolbox since it provides the clearest view of company value.

Micron Technology’s stock has made impressive gains over the last three months and investors may very well decide to take some chips off the table. However, the stock still appears to have some additional upside potential based on its future cash flow projections.

A DCF analysis is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only tool you use when researching a company. For Micron Technology, I’ve put together additional metrics you should look at:

Valuation: what is Micron Technology’s EBITDA less CapEx multiple and how does it compare to its peers? This is a helpful multiple to analyze when comparing capital intensive businesses. View the company’s EBITDA less CapEx multiple here.

Risk Metrics: how is Micron Technology’s financial health? Find out by viewing our financial leverage data metric which plots the dollars in total assets for each dollar of common equity over time.

Efficiency Metrics: inventory turnover is a ratio that measures the number of times a company’s inventory is sold and replaced over the year. View Micron Technology’s inventory turnover here.


Author: Andy Pai

Expertise: financial modeling, mergers & acquisitions

Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights:

  • Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores.
  • Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets.

Andy can be reached at andy@finbox.io.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

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Estimating The Intrinsic Value Of Micron Technology, Inc. (NASDAQ: MU)

Spinoffs – A Favorite Of Joel Greenblatt

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Joel Greenblatt needs no introduction. The professor turned hedge fund manager made a name for himself after achieving an annualized return of over 40% from 1985 to 2006. While most value investors are familiar with his “magic formula investing” strategy, less are familiar with one of his favorite asset classes known as “Spinoffs.”

In his book “You Can Be A Stock Market Genius,” Greenblatt describes a spinoff as the process in which “A corporation takes a subsidiary, division or part of its business and separates it from the parent company by creating a new, independent, freestanding company.” When analyzing a Spinoff, the corporation parting with the subsidiary, division or business unit is referred to as the “Parent” while the spun-off subsidiary, division or business is referred to as the “Spinoff.” Spinoffs create interesting investment opportunities and are just as prevalent today as when Greenblatt was managing his Gotham Fund.

According to a study by Deloitte and The Edge, since January of 2000, the worldwide asset class of Spinoffs has generated over 10x times the average gains of the MSCI World Index during their first 12 months independent of the parent.

The study also found when a parent company takes longer than six months to prepare, an average 50% greater return is produced after one year for the spinoff.

Greenblatt isn’t the only value investor who looks for opportunities in spinoffs. According to Mohnish Pabrai, when he and Gary Spier paid to have lunch with Warren Buffett and Charlie Munger, one of the three pieces of notable advice Munger mentioned was “carefully study spinoffs.” The fact that Munger took time to single out a specific type of investment opportunity is enough to make any investor take note.


What Is A Spinoff?

The mechanics of a Spinoff are simple to understand. When a Spinoff takes place, you as the investor are given an underlying position in the new company. The board of directors sets an exit date (similar to a dividend), and all active shareholders on record as of that date receive shares.

Before venturing further into the world of Spinoffs, it’s important to understand why a Parent company would choose to execute a Spinoff.


Why Do Spinoffs Occur?

At a starting point, a Spinoff can provide a vehicle for clarity. It is not uncommon for businesses to start, acquire, or combine operations that would put the business operating away from its core competency. As the diversified operating unit grows and contributes more to the overall performance of the company, it becomes more difficult for markets to place a value on the core business model. These unrelated businesses operating under the same company muddy transparency and often result in markets undervaluing the true potential of the separate units (commonly referred to as the asymmetric information hypothesis). Spinning off a division creates a wholly related entity that can be better understood and valued by markets (true for both the Parent and the Spinoff).

Another situation that warrants a Spinoff is the possibility that a good business needs to be separated from a not so great business. It is not uncommon to have divisions or subsidiaries that are unfortunately being held back as a result of operating under the umbrella of the parent company. It is also not uncommon to find a division or subsidiary that is dragging down the parent company. Either way, a spinoff can create an opportunity for good businesses to separate from bad businesses and operate on their own.

Realizing value is the primary driver behind Spinoffs. Different businesses are valued differently. When management feels the market is assigning a valuation method to the entire business that is unfair towards a division, a Spinoff becomes an appropriate solution. For example, if an oil and gas company creates a technology division to serve its units, it might reach a point where that technology division is a substantial business on its own. Spinning off the technology division would ensure its earnings are not grouped into the same valuation method as the core business of oil and gas.

A fourth reason that spinoffs come into play is the legalities around taxes. Without going into too much detail, spinoffs in most countries are performed as a tax-free transaction. Similarly, a spinoff can be staged via a tactic referred to as a Morris Trust Transaction to assist with an acquisition strategy. A Morris Trust Transaction is when a regular tax-free spinoff is completed followed immediately by a pre-arranged tax-free acquisition (typically by a strategic buyer).

Finally one of the last main reasons a company would complete a spinoff is to solve a strategic or regulatory issue. This typically comes about as a way to adhere to antitrust regulations.


What Happens After A Spinoff?

Every spinoff is different, and it is essential you research the mechanics and reasoning for the Spinoff in the first place. Typically following a Spinoff, the new entity will see a short-term decline in price. A decline in price may seem counterintuitive at first, but if you step back and ask yourself why this might occur the reasoning is simple. Remember, the stock of a spinoff is awarded to current shareholders of the parent company. These holders often are portfolio managers, pension funds, insurance companies, and index funds.

For a portfolio manager, the spinoff might not meet the portfolio’s investment criteria and thus must be sold off. A similar situation happens for an index. The index may have held the parent company based on certain criteria that the spinoff just does not meet, thus creating a need to exit.

Institutions face similar conundrums. As detailed in his book “Margin of Safety, Risk Averse Value Investing Strategies for the Thoughtful Investor,” Seth Klarman describes perfectly as to the dilemma an institutional investor faces;

“An institutional investor managing $1 billion might hold twenty-five security positions worth approximately $40 million each. Such an investor might have owned one million Tandy shares trading at $40. He or she would have received a spinoff of 200,000 InterTAN shares having a market value of $2.2 million. A $2.2 million position is insignificant to this investor; either the stake in InterTAN will be increased to the average position size of $40 million, or it will be sold. Selling the shares is the path of least resistance since the typical institutional investor probably knows little and cares even less about InterTAN. Even if that investor wanted to, though, it is unlikely that he or she could accumulate $40 million worth of InterTAN stock, since that would amount to 45 percent of the company at prevailing market prices (and that almost certainly would violate a different constraint about ownership and control).”

Overall the forced selling that occurs right out of the gate creates an excellent opportunity for smaller investors and value investors alike.


Evaluating A Spinoff

It should come as no surprise that analyzing a spinoff is very similar to evaluating any other investment opportunity. In addition to your usual analysis, you might consider paying particular attention to the following three areas.

Capital Structure

First, look at the capital structure of the deal as it pertains to both the parent and the spinoff. It is common for the Spinoff to be loaded up with debt or cash. Loading up the Spinoff is a way for the parent company to transfer these assets and liabilities in a tax-free manner. Understanding what the balance sheet looks like will put you in a better position to analyze the potential performance. Greenblatt was a fan of taking positions when leverage would pay asymmetrical risk rewards. As stated by Greenblatt;

“Believe it or not, far from being a one-time insight, tremendous leverage is an attribute found in many spinoff situations. Remember, one of the primary reasons a corporation may choose to spin off a particular business is its desire to receive value for a business it deems undesirable and troublesome to sell. What better way to extract value from a spinoff than to palm off some of the parent company’s debt onto the spinoff’s balance sheet? Every dollar of debt transferred to the new spinoff company adds a dollar of value to the parent. The result of this process is the creation of a large number of inordinately leveraged spinoffs. Though the market may value the equity in one of these spinoffs at $1 per every $5, $6, or even $10 of corporate debt in the newly created spinoff, $1 is also the amount of your maximum loss. Individual investors are not responsible for the debts of a corporation. Say what you will about the risks of investing in such companies, the rewards of sound reasoning and good research are vastly multiplied when applied in these leveraged circumstances.”

Management Incentives

Next, get an in-depth understanding of the incentives management has for performance within the spinoff. Joel Greenblatt used management incentives as his top metric when evaluating a spinoff. Another wisdom snippet of Greenblatt;

“Insider participation is one of the key areas to look for when picking and choosing between spinoffs— for me, the most important area. Are the managers of the new spinoff incentivized along the same lines as shareholders? Will they receive a large part of their potential compensation in stock, restricted stock, or options? Is there a plan for them to acquire more? When all the required public documents about the spinoff have been filed, I usually look at this area first.”

Parent or Spinoff

Finally, be sure to evaluate how both the parent and the spinoff will look post deal. Remember, advantageous opportunities post-spinoff do not reside exclusively in the spinoff. As an individual investor, you have the opportunity to take a position in the parent, the spinoff, or both.

Overall, Spinoffs offer an attractive hunting ground for undervalued opportunities. Most analysts agree as activist funds increase in popularity, more demand will be placed on utilizing spinoffs to further realize shareholder value. Keeping these special situations on your radar will give you that much more opportunity to find a sound investment.

Sources;
The Edge Deloitte Global Spinoff Study

Klarman, S. A. (1991). Margin of safety: risk-averse value investing strategies for the thoughtful investor. New York: Harper Business.

Greenblatt, J. (1999). You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits. New York: Simon & Schuster.


Author: Carter Johnson

Expertise: Entrepreneurship and business strategy

Carter is the founder of United Business Leaders which invests in private companies with strong operating histories. He has a passion for investing and helping businesses with strategic initiatives.

Connect with Carter on LinkedIn.

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Spinoffs – A Favorite Of Joel Greenblatt

The Most Attractively Priced Stocks In Leon Cooperman’s Portfolio

in INVESTING IDEAS by

Omega Advisors recently disclosed its stock holdings via a 13F filing. I analyzed the firm’s holdings and found the most attractive stocks based on dividend yields, P/E ratios as well as other fundamental indicators.


Finding The Right Price

Leon Cooperman is the chairman and CEO of Omega Advisors, a New York-based investment advisory firm managing over $3.5 billion in AUM. Although many consider Cooperman as a traditional value investor, he is also a generalist and market timer. He will buy any asset if he believes the price is right, whether it’s a growth stock, a blue chip, a small cap or even a bond. He has said that:

“I’ll buy generally any stock or bond at the right price. I find over the years, if I buy something at the right price, invariably I get lucky.”

In order to find if the price is right, Cooperman has said that he looks at a combination of intrinsic values, dividend yields, price-to-earnings ratios, and growth rates.

So I went through Omega Advisors’ stock portfolio as listed in its recent 13F filing to find the most attractive stocks for each of the criteria mentioned above.


Omega Advisors’ Most Undervalued Holdings

To determine which stocks are trading below their intrinsic value, aka “fair value” I used the finbox.io Fair Value estimates. I also applied consensus Wall Street analyst price targets to create a blended upside which I then used to rank the most undervalued holdings.

Here are the top 7 stocks in Leon Cooperman’s portfolio based on my calculations:

Omega Advisors Most Undervalued Holdings
Ticker Name Upside (finbox.io) Upside (Analyst Target) Blend Upside
CX CEMEX SAB DE CV 67.7% 43.3% 55.5%
MDCA MDC PARTNERS INC 37.4% 58.8% 48.1%
INSM INSMED INC 39.7% 52.7% 46.2%
SBGI SINCLAIR BROADCAST GROUP INC 33.4% 51.1% 42.3%
CBS CBS CORP 41.5% 34.9% 38.2%
ETE ENERGY TRANSFER EQUITY LP 38.8% 34.4% 36.6%
FDC FIRST DATA CORP 33.4% 39.7% 36.5%

Cemex SAB de CV (ADR) (NYSE: CX) appears to be the most undervalued stock in the fund. The company has a blended upside of 55.5% relative to its current trading price.

MDC Partners Inc (Nasdaq: MDCA) appears to be the second most undervalued stock in the portfolio. The company’s blended upside of 48.1% is very intriguing. Value investors may want to take a closer look at the stocks above.


Omega Advisors’ Best Dividend Yields

The next ranking table lists the stocks in Omega Advisors’ portfolio with the best dividend yields. Dividend seekers can appreciate stocks that earn upwards of 5% excluding price appreciation and are also backed by a prominent investor.

Omega Advisors Best Dividend Yields
Ticker Name Dividend Yield % Of Portfolio
SNR NEW SENIOR INVESTMENT GROUP IN 12.6% 0.1%
CIM CHIMERA INVESTMENT CORP 11.6% 0.1%
EFC ELLINGTON FINANCIAL LLC 11.3% 0.1%
NEWM NEW MEDIA INVESTMENT GROUP INC 8.6% 1.6%
GLPI GAMING AND LEISURE PROPERTIES 7.6% 0.4%
ETE ENERGY TRANSFER EQUITY LP 7.6% 0.7%
NAVI NAVIENT CORP 4.7% 0.9%

New Senior Investment Group Inc (NYSE: SNR) is the highest yielding dividend stock in Omega Advisors’ portfolio. The current share price and dividend offer income investors a yield of 12.6%.

CHIMERA Invt Co/SH NEW (NYSE: CIM) is the next highest dividend yielding stock in Leon Cooperman’s portfolio which currently offers a yield of 11.6%.


Omega Advisors’ Low P/E Ratio Stocks

The P/E Ratio indicates the multiple of earnings stock investors are willing to pay for one share of the company. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends. The following table summarizes the firm’s holdings with the lowest P/E multiple.

Omega Advisors Low P/E Ratio Stocks
Ticker Name P/E Ratio LTM % Of Portfolio
CIM CHIMERA INVESTMENT CORP 5.3x 0.1%
NAVI NAVIENT CORP 6.8x 0.9%
MVC MVC CAPITAL INC 6.9x 0.1%
AMCX AMC NETWORKS INC 9.6x 5.8%
UAL UNITED CONTINENTAL HOLDINGS IN 9.9x 5.7%
ALLY ALLY FINANCIAL INC 12.3x 1.0%
SYF SYNCHRONY FINANCIAL 12.9x 1.8%

Mentioned for the second time, the cheapest stock that Omega Advisors owns is CHIMERA (NYSE: CIM) which currently trades at 5.3x earnings.

The next cheapest stock that Leon Cooperman owns is Navient Corp (Nasdaq: NAVI) which has a P/E ratio of 6.8x.


Omega Advisors’ Fastest Growing Stocks

Analysts often look at companies as either thriving, surviving or dying. Analyzing a company’s revenue growth can help distinguish between these stages. Growth of over 10% typically signifies the core business is doing very well and the company’s products and services are in demand.

The table below lists 7 stocks in Omega Advisors’ portfolio that have strong top-line growth.

Omega Advisors Fastest Growing Stocks
Ticker Name Revenue Growth % Of Portfolio
FOLD AMICUS THERAPEUTICS 1076.9% 0.1%
PE PARSLEY ENERGY INC 118.7% 1.9%
DXC DXC TECHNOLOGY CO 115.8% 1.0%
SHPG SHIRE PLC 59.3% 5.7%
FB FACEBOOK INC 47.1% 1.9%
ETE ENERGY TRANSFER EQUITY LP 46.8% 0.7%
DVMT DELL TECHNOLOGIES INC 42.2% 1.9%

Amicus Therapeutics, Inc. (Nasdaq: FOLD) is the fastest growing company in Omega Advisors’ portfolio. The company’s LTM total revenue of $25 million is up over 1,000% year-over-year. Very impressive. Note that the stock price is also up 106.6% over the last twelve months.

The Ideas section of finbox.io tracks top investors and trending investment themes. You can get the latest data on the holdings discussed above at the Omega Advisors page.


Who Is Leon Cooperman And Why Track His Holdings?

Leon Cooperman’s career in the investment industry spans over 50 years. After 25 years at Goldman Sachs, he started the hedge fund Omega Advisors, where he remains Chairman and CEO.

Cooperman began his career at Goldman Sachs immediately after graduating with an MBA from Columbia. His focus for most of that time was investment research. He was voted the number one portfolio strategist, in the Institutional Investor “All-America Research Team” survey, for nine consecutive years. When he left the company in 1991 he was chairman and CEO of Goldman Sachs Asset Management. He was also the CIO of the Goldman Sachs Capital Growth Fund.

In 1991 he started Omega Advisors which has gone on to build an enviable track record. Between 1992 and 2014 the fund returned 14.6% a year. It also outperformed the S&P 500 Index during 12 consecutive years from 1999 to 2010.

Cooperman is known for his work ethic, and was described by well-known investor, Doug Kaas, as “the hardest working man in the industry.” It’s believed that he has only taken one two-week vacation in his entire career. Another former employee said, “He has no hobbies, no anything. This is what he does.” During this time, Cooperman has built a personal fortune of $3.1 billion.

It is important to note that Cooperman’s holdings discussed above were determined from filings which are due 45 days after the quarter end date. Therefore, Omega Advisors’ holdings above represent positions held as of December 31st and not necessarily reflective of the fund’s current stock holdings.


Author: Matt Hogan

Expertise: Valuation, financial statement analysis

Matt Hogan is a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.

His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and investing.com.

Matt can be reached at matt@finbox.io.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

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Source: finbox.io mavericks analysis
The Most Attractively Priced Stocks In Leon Cooperman’s Portfolio

The Most Attractively Priced Stocks In Leon Cooperman's Portfolio

in INVESTING IDEAS by

Omega Advisors recently disclosed its stock holdings via a 13F filing. I analyzed the firm’s holdings and found the most attractive stocks based on dividend yields, P/E ratios as well as other fundamental indicators.


Finding The Right Price

Leon Cooperman is the chairman and CEO of Omega Advisors, a New York-based investment advisory firm managing over $3.5 billion in AUM. Although many consider Cooperman as a traditional value investor, he is also a generalist and market timer. He will buy any asset if he believes the price is right, whether it’s a growth stock, a blue chip, a small cap or even a bond. He has said that:

“I’ll buy generally any stock or bond at the right price. I find over the years, if I buy something at the right price, invariably I get lucky.”

In order to find if the price is right, Cooperman has said that he looks at a combination of intrinsic values, dividend yields, price-to-earnings ratios, and growth rates.

So I went through Omega Advisors’ stock portfolio as listed in its recent 13F filing to find the most attractive stocks for each of the criteria mentioned above.


Omega Advisors’ Most Undervalued Holdings

To determine which stocks are trading below their intrinsic value, aka “fair value” I used the finbox.io Fair Value estimates. I also applied consensus Wall Street analyst price targets to create a blended upside which I then used to rank the most undervalued holdings.

Here are the top 7 stocks in Leon Cooperman’s portfolio based on my calculations:

Omega Advisors Most Undervalued Holdings
Ticker Name Upside (finbox.io) Upside (Analyst Target) Blend Upside
CX CEMEX SAB DE CV 67.7% 43.3% 55.5%
MDCA MDC PARTNERS INC 37.4% 58.8% 48.1%
INSM INSMED INC 39.7% 52.7% 46.2%
SBGI SINCLAIR BROADCAST GROUP INC 33.4% 51.1% 42.3%
CBS CBS CORP 41.5% 34.9% 38.2%
ETE ENERGY TRANSFER EQUITY LP 38.8% 34.4% 36.6%
FDC FIRST DATA CORP 33.4% 39.7% 36.5%

Cemex SAB de CV (ADR) (NYSE: CX) appears to be the most undervalued stock in the fund. The company has a blended upside of 55.5% relative to its current trading price.

MDC Partners Inc (Nasdaq: MDCA) appears to be the second most undervalued stock in the portfolio. The company’s blended upside of 48.1% is very intriguing. Value investors may want to take a closer look at the stocks above.


Omega Advisors’ Best Dividend Yields

The next ranking table lists the stocks in Omega Advisors’ portfolio with the best dividend yields. Dividend seekers can appreciate stocks that earn upwards of 5% excluding price appreciation and are also backed by a prominent investor.

Omega Advisors Best Dividend Yields
Ticker Name Dividend Yield % Of Portfolio
SNR NEW SENIOR INVESTMENT GROUP IN 12.6% 0.1%
CIM CHIMERA INVESTMENT CORP 11.6% 0.1%
EFC ELLINGTON FINANCIAL LLC 11.3% 0.1%
NEWM NEW MEDIA INVESTMENT GROUP INC 8.6% 1.6%
GLPI GAMING AND LEISURE PROPERTIES 7.6% 0.4%
ETE ENERGY TRANSFER EQUITY LP 7.6% 0.7%
NAVI NAVIENT CORP 4.7% 0.9%

New Senior Investment Group Inc (NYSE: SNR) is the highest yielding dividend stock in Omega Advisors’ portfolio. The current share price and dividend offer income investors a yield of 12.6%.

CHIMERA Invt Co/SH NEW (NYSE: CIM) is the next highest dividend yielding stock in Leon Cooperman’s portfolio which currently offers a yield of 11.6%.


Omega Advisors’ Low P/E Ratio Stocks

The P/E Ratio indicates the multiple of earnings stock investors are willing to pay for one share of the company. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends. The following table summarizes the firm’s holdings with the lowest P/E multiple.

Omega Advisors Low P/E Ratio Stocks
Ticker Name P/E Ratio LTM % Of Portfolio
CIM CHIMERA INVESTMENT CORP 5.3x 0.1%
NAVI NAVIENT CORP 6.8x 0.9%
MVC MVC CAPITAL INC 6.9x 0.1%
AMCX AMC NETWORKS INC 9.6x 5.8%
UAL UNITED CONTINENTAL HOLDINGS IN 9.9x 5.7%
ALLY ALLY FINANCIAL INC 12.3x 1.0%
SYF SYNCHRONY FINANCIAL 12.9x 1.8%

Mentioned for the second time, the cheapest stock that Omega Advisors owns is CHIMERA (NYSE: CIM) which currently trades at 5.3x earnings.

The next cheapest stock that Leon Cooperman owns is Navient Corp (Nasdaq: NAVI) which has a P/E ratio of 6.8x.


Omega Advisors’ Fastest Growing Stocks

Analysts often look at companies as either thriving, surviving or dying. Analyzing a company’s revenue growth can help distinguish between these stages. Growth of over 10% typically signifies the core business is doing very well and the company’s products and services are in demand.

The table below lists 7 stocks in Omega Advisors’ portfolio that have strong top-line growth.

Omega Advisors Fastest Growing Stocks
Ticker Name Revenue Growth % Of Portfolio
FOLD AMICUS THERAPEUTICS 1076.9% 0.1%
PE PARSLEY ENERGY INC 118.7% 1.9%
DXC DXC TECHNOLOGY CO 115.8% 1.0%
SHPG SHIRE PLC 59.3% 5.7%
FB FACEBOOK INC 47.1% 1.9%
ETE ENERGY TRANSFER EQUITY LP 46.8% 0.7%
DVMT DELL TECHNOLOGIES INC 42.2% 1.9%

Amicus Therapeutics, Inc. (Nasdaq: FOLD) is the fastest growing company in Omega Advisors’ portfolio. The company’s LTM total revenue of $25 million is up over 1,000% year-over-year. Very impressive. Note that the stock price is also up 106.6% over the last twelve months.

The Ideas section of finbox.io tracks top investors and trending investment themes. You can get the latest data on the holdings discussed above at the Omega Advisors page.


Who Is Leon Cooperman And Why Track His Holdings?

Leon Cooperman’s career in the investment industry spans over 50 years. After 25 years at Goldman Sachs, he started the hedge fund Omega Advisors, where he remains Chairman and CEO.

Cooperman began his career at Goldman Sachs immediately after graduating with an MBA from Columbia. His focus for most of that time was investment research. He was voted the number one portfolio strategist, in the Institutional Investor “All-America Research Team” survey, for nine consecutive years. When he left the company in 1991 he was chairman and CEO of Goldman Sachs Asset Management. He was also the CIO of the Goldman Sachs Capital Growth Fund.

In 1991 he started Omega Advisors which has gone on to build an enviable track record. Between 1992 and 2014 the fund returned 14.6% a year. It also outperformed the S&P 500 Index during 12 consecutive years from 1999 to 2010.

Cooperman is known for his work ethic, and was described by well-known investor, Doug Kaas, as “the hardest working man in the industry.” It’s believed that he has only taken one two-week vacation in his entire career. Another former employee said, “He has no hobbies, no anything. This is what he does.” During this time, Cooperman has built a personal fortune of $3.1 billion.

It is important to note that Cooperman’s holdings discussed above were determined from filings which are due 45 days after the quarter end date. Therefore, Omega Advisors’ holdings above represent positions held as of December 31st and not necessarily reflective of the fund’s current stock holdings.


Author: Matt Hogan

Expertise: Valuation, financial statement analysis

Matt Hogan is a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.

His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and investing.com.

Matt can be reached at matt@finbox.io.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

//load.sumome.com/
Source: finbox.io mavericks analysis
The Most Attractively Priced Stocks In Leon Cooperman’s Portfolio

Here’s Why Praesidium Sold Its $200 Million Stake In Progress Software (PRGS)

in INVESTING IDEAS by

Here's Why Praesidium Sold Its $200 Million Stake In Progress Software (PRGS)

A new filing with the SEC revealed that Praesidium Investment Management sold the majority of its Progress Software Corporation (NASDAQ: PRGS) stake over the last two months.


Praesidium Exits Progress Software

On February 14th, Praesidium Investment Management filed its quarterly Form 13F regulatory filing. The filing showed that the investment firm held 4,328,476 shares of Progress Software worth $184.3 million as of December 31st. This was also the firm’s largest stock position which represented 14.3% of its listed holdings.

The following table summarizes the firm’s largest holdings as of December 31st:

Praesidium Largest Holdings
Ticker Name Holding ($mil) % Of Portfolio
PRGS PROGRESS SOFTWARE CORP $184.3 14.3%
PTC PTC INC $126.6 9.8%
ACN ACCENTURE PLC IRELAND $120.2 9.3%
AXTA AXALTA COATING SYS LTD $114.3 8.9%
CSOD CORNERSTONE ONDEMAND INC $104.3 8.1%
DOOR MASONITE INTL CORP NEW $94.6 7.3%
OTEX OPEN TEXT CORP $94.5 7.3%

However, a new filing this evening revealed that the investment firm sold 4,327,479 shares worth a total of $195 million over the last two months. This reduced Praesidium’s position in the company to virtually 0%.

Recent Progress Software Corporation Insider Transactions
Transaction Date #Shares Value ($)
sale Jan 11 134,192 $6,810,244
sale Jan 12 250,822 $12,759,315
sale Jan 31 3,270 $163,729
sale Feb 05 5,480 $263,259
sale Feb 06 40,100 $1,924,399
sale Feb 07 7,200 $345,384
sale Feb 14 4,767 $228,673
sale Feb 15 33,940 $1,628,102
sale Feb 16 7,700 $369,369
sale Feb 21 70,000 $3,432,800
sale Feb 22 12,176 $589,805
sale Mar 05 3,757,832 $166,810,162
TOTAL 4,327,479 $195,325,242

Progress Software’s shares last traded at $44.41 as of Wednesday’s close, down -8.3% over the last month but still up 51.6% over the last year. Could the recent selling activity signal a troubling road ahead for shareholders?

Here's Why Praesidium Sold Its $200 Million Stake In Progress Software (PRGS)


Potential Reasons For Selling Shares

According to its website, Praesidium Investment Management is a value-oriented investment management firm based in New York City. The firm’s strategy consists of performing “an intense, fundamental, grassroots research process on each potential investment to identify the key long-term business drivers of the company and its industry.”

Progress Software provides software solutions for various industries worldwide. It sells its products directly to end users, as well as indirectly to application partners, original equipment manufacturers, and system integrators.

Analysts covering the stock often compare the company to a peer group that includes Quantum (NYSE: QTM), Red Hat (NYSE: RHT), Pegasystems (Nasdaq: PEGA) and Qualys (Nasdaq: QLYS). Analyzing Progress Software’s financial metrics and ratios relative to this peer group offers insight into why Praesidium sold its ownership stake.

Return on Equity (ROE) measures a company’s profitability in relation to the book value of Shareholders’ Equity. ROE is a measure of how effectively management makes investments to generate earnings for shareholders.

The company’s latest ROE of 9.8% is only above Quantum (6.8%) and below Red Hat (24.9%), Pegasystems (13.0%) and Qualys (15.3%).

Here's Why Praesidium Sold Its $200 Million Stake In Progress Software (PRGS)source: finbox.io

Another helpful metric is Return on Assets (ROA) which represents the dollars in earnings or Net Income a company generates per dollar of assets. ROA is typically used to gauge the efficiency of the company and its management at deploying capital to generate income for shareholders. In general, a higher return on assets suggests management is utilizing the asset base efficiently. Progress Software’s ROA of 5.2% is also below the majority of its peers.

In addition, the company’s top-line is expected to underperform this same peer group moving forward. Projected 5-year revenue CAGR is the average annual growth rate of revenue over a five year period. It’s calculated as follows:

5yr CAGR = [ Revenue FY+5 / Revenue FY ] ^ (1/5 years) - 1

The chart below plots the five-year revenue compounded annual growth rate for Progress Software and it’s peers. The company’s projected 5-year revenue CAGR of 0.4% is only above QTM (-1.1%) and below RHT (13.8%), PEGA (13.8%) and QLYS (13.7%).

Here's Why Praesidium Sold Its $200 Million Stake In Progress Software (PRGS)source: finbox.io

Note that the company’s historical 5-year revenue CAGR of 4.6% is also generally below its selected peers.

Finally, a number of future cash flow models imply that the stock’s overvalued. The median fair value estimate of $32.16 implies -27.6% downside and is calculated from 8 separate analyses as shown in the table above. Note that each model uses consensus Wall Street estimates for the forecast when available.

Progress Software Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF Revenue Exit $32.39 -27.1%
5-yr DCF Revenue Exit $31.93 -28.1%
Peer Revenue Multiples $29.41 -33.8%
10-yr DCF EBITDA Exit $55.25 24.4%
Peer EBITDA Multiples $60.90 37.2%
10-yr DCF Growth Exit $31.52 -29.0%
5-yr DCF Growth Exit $30.41 -31.5%
Peer P/E Multiples $47.79 7.6%
Median $32.16 -27.6%

Even though Progress Software shares have traded lower over the last month, the stock is still way up from its 52-low and appears to be trading at a premium to its intrinsic value. This could be a reason why Praesidium virtually exited its position in the company. The firm’s analysts may have looked at similar analyses as the ones above.

Keeping an eye on the buying and selling activity of large institutional funds can help smaller investors make more informed decisions.


Author: Matt Hogan

Expertise: Valuation, financial statement analysis

Matt Hogan is a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.

His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and investing.com.

Matt can be reached at matt@finbox.io.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Here's Why Praesidium Sold Its $200 Million Stake In Progress Software (PRGS)

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Source: finbox.io mavericks analysis
Here’s Why Praesidium Sold Its 0 Million Stake In Progress Software (PRGS)

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