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Value-oriented Equity Investment Ideas for Sophisticated Investors
Table of Contents
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Value-oriented Equity Investment Ideas for Sophisticated Investors
Editorial Commentary
We devoted our January issue to large-cap value investment ideas, highlighting
such household names as Cisco Systems (CSCO), Pfizer (PFE) and Travelers (TRV).
This month, we travel to the other end of the market capitalization spectrum, aiming
to uncover opportunities among companies with market caps of less than $2 billion.
The names include RadioShack (RSH),
Our team has gained quite a bit of experience in this less widely scrutinized part
of the market over the years. The search for compelling ideas has taken us back to a
few companies we have known for some time but may have passed on due to price
or other considerations. In the November 2008 issue of The Manual of Ideas, we
profiled RadioShack (RSH), a retailer with a tired brand and unimpressive financial
results. RadioShack embarked on a turnaround led by an executive team with
experience at Eddie Lampert’s Kmart/Sears. Fast-forward two-and-a-half years:
RadioShack’s stock price is roughly where stood in late 2008, while the company
has grown same-store sales, transitioned to more attractive mobile products,
generated lots of free cash, and repurchased a large number of shares. In short, the
company has, in our view, become an intriguing and timely opportunity.
Of course, investors in small- and micro-cap public companies are well aware of
the minefield that awaits those who enter uncharted territory in search of value. Over
the past few years, dozens of small companies that trade on U.S. stock exchanges but
operate exclusively in China have passed various value-oriented screens due to their
apparently solid balance sheets and strong earnings. Unfortunately, investors are now
finding out the truth about many of those companies: The founders and sponsors
were often betting on the gullibility of U.S. investors — put “China” in a name, raise
money in an IPO, and then lie your way to an increasing stock price. Scores of
Chinese small-caps have recently been revealed as frauds, hurting not only U.S.
investors but also honest Chinese business owners. We warned about U.S.-traded
Chinese education companies in our July 2009 issue, and we have eliminated most of
those companies from the small- and micro-cap screens in this report.
We find the following small- and micro-caps particularly interesting at this time:
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Value-oriented Equity Investment Ideas for Sophisticated Investors
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RadioShack’s performance has improved markedly over the past three years,
with outgoing CEO Julian Day, formerly of Kmart, deserving much credit.
RadioShack posted a 4% comparable sales increase in 2010 and has been buying
back stock meaningfully below our estimate of fair value, making this one of the
more compelling small-cap ideas we have encountered recently.
A long-term caveat is that consumer electronics retailing remains a business in
which high returns on capital may not be sustainable.
With analysts projecting 2011 and 2012 EPS of $1.72 and $1.87, respectively,
we consider RadioShack a compelling risk-reward at roughly $14 per share.
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Value-oriented Equity Investment Ideas for Sophisticated Investors
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Value-oriented Equity Investment Ideas for Sophisticated Investors
“Magic Formula,” based on This Year’s EPS Estimates (MV < $2 billion)
Companies with high returns on capital employed, trading at high earnings yields (based on this FY EPS estimates)
▼ ▼
Move To This FY EBIT/ Price to Insiders
Price 52-Week MV EV EV/ EPS Capital Tax Tangible % Buys/
Company Ticker ($) Low High ($mn) ($mn) Sales Yield Employed Rate Book Own. Sells
1 * New Energy Systems NEWN 4.17 -2% 121% 52 43 .5x 34% 235% 22% 3.5x 0% -/-
2 ITT Educational ESI 67.74 -26% 80% 1,921 1,758 1.1x 14% infinite 39% >9.9x 0% 12 / 2
3 * inTEST INTT 3.39 -58% 38% 35 30 .7x 23% 141% 1% 2.9x 3% -/3
4 Bridgepoint Edu. BPI 18.02 -29% 53% 957 678 1.0x 13% infinite 41% 4.1x 1% 7/7
5 Lihua International LIWA 9.46 -23% 38% 283 195 .5x 19% 133% 27% 1.8x 48% 2/-
6 Metropolitan Health MDF 4.42 -34% 20% 180 132 .4x 12% 2665% 38% 2.9x 3% 4/4
7 ePlus PLUS 25.72 -36% 18% 218 194 .2x 12% infinite 39% 1.2x 9% 7/8
8 Power-One PWER 8.35 -59% 56% 870 697 .7x 14% 243% 41% 3.3x 2% 2/4
9 Career Education CECO 20.77 -21% 73% 1,607 1,160 .5x 12% 789% 33% 3.7x 0% 7/5
10 * Zoo Entertainment ZOOG 3.87 -14% n/a 24 23 .3x 15% 156% >99% 2.6x 0% 1/-
11 VirnetX VHC 12.47 -68% 60% 618 540 n/m 12% infinite 45% >9.9x 0% 2/3
12 * BioDelivery Sciences BDSI 3.22 -34% 33% 78 55 .8x 11% infinite 1% >9.9x 0% -/-
13 GT Solar SOLR 10.55 -54% 13% 1,318 1,136 1.4x 11% infinite 36% >9.9x 0% 10 / 14
14 * Biostar Pharma BSPM 1.84 -12% 199% 50 33 .5x 34% 78% 29% 1.2x 0% -/-
15 * ZST Digital Networks ZSTN 5.96 -26% 58% 70 46 .3x 37% 74% 27% 1.0x 40% 1/-
16 * IDT Corp. IDT 23.69 -74% 27% 545 327 .2x 11% infinite 6% 2.9x 13% 6/1
17 Exceed Company EDS 6.83 -14% 53% 134 39 .1x 27% 78% 8% .6x 0% -/-
18 Nephros NEP 4.56 -39% 121% 135 77 .8x 22% 82% 20% 1.2x 23% -/2
19 * China Electric Motor CELM 3.07 -1% 222% 67 31 .3x 28% 72% 27% 1.0x 0% -/-
20 Kulicke and Soffa KLIC 8.60 -39% 23% 614 511 .7x 14% 104% 2% 2.2x 2% 14 / 12
21 Lincoln Educational LINC 14.77 -34% 91% 331 354 .6x 13% 117% 41% 3.0x 5% 9/8
22 * Vertro VTRO 3.50 -52% 107% 25 19 .5x 10% infinite n/m 6.0x 9% 6/6
23 Veeco Instruments VECO 48.06 -39% 13% 1,952 1,417 1.5x 11% 248% 4% 2.8x 1% 4/6
24 China Valves CVVT 5.26 -3% 182% 188 167 .9x 30% 66% 25% 1.4x 0% -/-
25 * LTX-Credence LTXC 8.45 -41% 34% 418 293 1.1x 13% 101% n/m 2.8x 2% -/5
26 Gulf Resources GFRE 7.01 -10% 74% 244 175 1.1x 26% 65% 26% 1.3x 14% 6/1
27 SkyPeople Juice SPU 4.37 -10% 69% 112 76 .9x 21% 66% 31% 1.1x 0% -/-
28 America’s Car-Mart CRMT 24.37 -16% 24% 258 316 .9x 10% 192% 37% 1.4x 1% 1/1
29 China Ceramics CCCL 6.62 -24% 53% 109 80 .5x 36% 58% 26% .8x 0% -/-
30 * LGL Group LGL 13.91 -72% 150% 31 28 .6x 28% 61% n/m 1.7x 13% 9/2
31 Actuate BIRT 4.83 -18% 26% 222 183 1.4x 10% infinite 26% 7.2x 4% 6/7
32 SciClone Pharma SCLN 3.94 -47% 14% 188 135 1.7x 12% 97% 4% 2.4x 0% -/-
33 Xyratex XRTX 11.02 -5% 86% 334 243 .2x 20% 61% n/m .9x 0% -/-
34 * Primoris Services PRIM 9.14 -39% 9% 451 413 .4x 10% 126% 40% 6.1x 3% 3/2
35 * PMC-Sierra PMCS 7.60 -10% 28% 1,773 1,676 2.6x 9% infinite 27% 6.0x 0% 5/8
36 * Amtech Systems ASYS 21.54 -62% 43% 203 150 .9x 10% 99% 39% 2.4x 2% 8/7
37 * Entropic Comms ENTR 7.55 -44% 85% 644 498 2.4x 11% 69% n/m 2.6x 0% 8/8
38 * Integrated Silicon ISSI 8.92 -27% 56% 237 163 .6x 14% 57% 1% 1.3x 0% 1/1
39 * Synaptics SYNA 26.85 -11% 26% 910 696 1.2x 9% 126% 11% 2.9x 0% 6/6
40 * Evolving Systems EVOL 6.91 -10% 21% 74 64 1.7x 9% 413% 12% 5.8x 2% 5/2
41 Cornerstone CRTX 5.80 -13% 31% 149 98 .8x 11% 70% n/m 3.2x 56% 2/3
42 Medicis Pharma MRX 29.92 -30% 9% 1,818 1,283 1.8x 8% infinite 40% 3.4x 1% -/2
43 Amedisys AMED 35.73 -36% 80% 1,054 1,115 .7x 9% 173% 39% >9.9x 1% -/3
44 * Advanced Battery ABAT 3.67 -18% 19% 281 169 1.7x 16% 48% 16% 1.5x 0% -/1
45 * Full House Resorts FLL 3.66 -39% 37% 66 53 1.6x 9% 171% 24% 2.8x 3% 1/2
Company website SEC Y! Price Charts Proxy Y!
* New additions are highlighted.
Screening criteria: ► MV < $2 billion ► ADRs and banks excluded ► Enterprise value to MV < 1.5
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Value-oriented Equity Investment Ideas for Sophisticated Investors
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Value-oriented Equity Investment Ideas for Sophisticated Investors
District of Columbia 13 -- -- 13 0%
Puerto Rico 56 -- -- 56 1%
U.S. Virgin Islands 4 -- -- 4 0%
4,486 1,267 1,176 6,929 100%
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Value-oriented Equity Investment Ideas for Sophisticated Investors
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