In past years, I have successfully used a screen that identifies companies that can take themselves private by levering up their balance sheet and using their cash flow to pay the interest payments. The screen assumes companies could get financing at 9% and could cover the tax adjusted interest payments if they stopped expanding and just spent a minimum in capital expenditures to continue operating.
If you assume that we don't enter a depression and the companies could actually get financing right now, a stunning number of high quality companies - companies with high cash flow and relatively low debt - could take themselves private at today's prices. Obviously, the assumptions of the screen are unrealistic currently. If General Electric (NYSE:GE) is paying Warren "Loan Shark" Buffett ten percent interest rates, then most other companies won't be able to find financing. But that's beside the point. At these prices, many quality companies are cheaper than they have been in history. Money is still available - it's just scared and sitting on the sidelines. If we see any return to stability in the financial system, many of the stocks on the list could see 25% - 50% upside just by a return to median multiple.
My original screen included over 200 companies that could take themselves private but I have filtered it to only include companies with relatively low debt to equity ratios. As a caveat, several of the companies on the list are coming off of cyclical peak earnings and won't be able to sustain the levels of cash flow they have generated in the past year.
However, many others are very steady cash generators with strong balance sheets. Some of the large cap stocks on the list, like Disney (NYSE:DIS), Applied Materials (NASDAQ:AMAT), and Exxon Mobile (NYSE:XOM) are unbelievable bargains. Many of the mid cap stocks are solid companies that have almost become small caps such as Federated Investors (NYSE:FII), MSC Industrial (NYSE:MSM) and Manpower (NYSE:MAN). And many of the small caps are now cheap, undiscovered gems such as Advanced Energy (NASDAQ:AEIS), Darling International (NYSE:DAR) and JDA Software (NASDAQ:JDAS).
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