With the economy showing signs of promise in areas like housing and even the jobs market, many companies and investors who have been waiting on the sidelines might be prepared to finally act and invest for a brighter future. We already see signs of this as the Dow Index recently hit 14,000, and it is trading near 5 year highs.
Companies are stuck with extremely low interest rates and one of the best places to deploy cash is to buy other companies. Many corporations have plenty of cash on the balance sheet that earns nearly nothing and companies can often generate much higher returns by acquiring other companies, especially competitors. Furthermore, with low rates, it is cheap to borrow money to finance acquisitions. There are also signs that private equity firms are becoming increasingly active as we see deals for companies like Dell (DELL) arise. In fact, a recent Wall Street Journal article details why a private equity and leveraged buyout boom could be coming.
When looking for stocks that are cheap but also have takeover potential, it can often be rewarding to focus on low-price stocks and smaller to mid-capitalization companies which are small enough for bigger competitors to acquire. Here are some cheap stocks to consider (which either trade below book value or well below the 52-week high or both) as merger and acquisition deals could be heating up into 2013:
Artio Global Investors, Inc. (ART) is a New York based investment firm with billions of dollars in assets under management. It offers funds for both stock and bond investors and it was founded in 1962. This is a potentially significant turnaround play, so I am going to go into further detail on this company. Artio has seen redemptions in some of its international equity funds due to disappointing results in the past. This is a problem for investment firms as investors can be fickle and either flood a fund with money when it performs well or withdraw when other funds are performing better. However, Artio might be poised for a major rebound or even a buyout as it appears that the worst could be over. It also looks like investors have taken the shares well below fair value. This presents what might be an excellent buying opportunity for a number of reasons.
First of all, Artio shares went public in 2009 for $25 and the stock now trades for about $2. This decline in share price seems very excessive and the stock could be primed for a significant rally. At just around $2, this company has a market capitalization of just about $120 million. This looks like pocket change when you consider that Artio reported around $14.3 billion in assets under management or "AUM" in December 2012. This was down from about $15 billion in "AUM" in November, but it appears that the redemptions are slowing down significantly which is great news. That could be a sign to buy this stock as it trades at what might be the bottom. When Artio reported "AUM" in October, it had $16.7 billion under management, and then it dropped to $15 billion or nearly 10%, but, as mentioned above, it only dropped by about $600 million or about 4% by December. This could be a sign that the worst is over and it might also mean that Artio's remaining "AUM" might be at levels which include its core investor base. Core investors who have stuck it out this long are probably not likely to leave the firm. Every investment management firm has a core base of investors that is likely to stay (for various reasons) regardless of short-term investment results and these companies also have "hot money" investors that come and go quite freely based on what the latest hot funds or sectors are doing. It is also important to note that Artio has a solid fixed-income business that has performed well and it has actually seen growth in "AUM." This might be another big reason why the redemption rate is slowing significantly, as the vast majority of the over $14 billion in assets are in the solid-performing fixed-income business.
With redemption rates slowing significantly, and since Artio still has over $14 billion under management and a market capitalization of just around $120 million, this company could be poised to see a big rebound in its stock as investors see the value in it, or even with a takeover offer from a major competitor. Another firm could easily see that buying Artio near current levels would be an extremely cheap way to add about $14 billion in assets.
Artio shares look extremely cheap by looking further into the balance sheet. This company has about $80 million in cash and just around $5.5 million in debt. The cash is equivalent to about $1.33 per share. When you back out the cash of roughly $80 million from the market capitalization, that leaves the company with an enterprise value of only about $42 million. This means that an acquiring company could get control of over $14 billion in assets, for just about $42 million (net of cash), based on the current share price. This is pocket change for many investment firms and Artio could also be very attractive as a buyout from a private equity firm. This bargain stock is also trading below book value which is $2.39 per share. In spite of having a tough year in 2012, Artio has been able to report positive adjusted earnings and EBITDA. For the nine months ended on September 30, 2012, the company reported adjusted earnings of 23 cents per share and adjusted net income of 7 cents per share for the third quarter of 2012. Chairman Richard Pell stated:
"Strategically, we have realigned the business around our expertise in cross-border investing across both equity and fixed income markets, with particular focus on repairing our International Equity track records and growing our highly rated fixed income strategies. At the same time, we continue to concentrate on managing expenses and maintaining the strength of our balance sheet, and remain focused on investing for future growth."
Artio insiders have a major stake in this company and that means that directors and officers appear to be aligned with shareholders. A couple of insiders (including Richard Pell, Chairman) own over 5 million shares each, (which is about 10% of the company) and a number of well-known mutual funds also own a significant stake. For example, Royce & Associates owns about 4.2 million shares or around 7% of the company. Markel Corporation owns nearly 5.7 million shares which is about 9.5% of the company and GAM Holding owns around 15.8 million shares or roughly 30% of Artio.
The risks could be that if redemptions get so bad, it causes the company to be unprofitable, but the outflows have been showing improvement as noted above. Plus, it is very likely to be able to post profits even with a lower asset base as it has been doing through cost-cutting and other measures. For these reasons, the downside looks limited from here, especially when you consider the strong balance sheet and still massive asset base ("AUM") of over $14 billion. I would not be surprised to see this stock double as investors realize the bargain valuation here, or rise significantly if a buyout offer is announced. With insiders owning a very significant stake, this would be one more reason why management might be open to a takeover deal.
It's important to consider that markets have been in rally mode for several weeks and that could boost investment results for Artio and its fund performance. Another bonus is that Artio pays a dividend of 8 cents per share, which yields about 4%. For further reading, Seeking Alpha's Liron Manor makes a solid case for why Artio shares are worth about $4 per share or just about double the current value (even without a takeover). That article came out in early December, but now that the tax-loss selling season is over, with a rally in the equity markets in recent weeks and with signs of diminished redemptions, it looks like the timing is right to buy this stock before a potentially large rebound or takeover. Assets under management can rise or fall as markets increase or decrease portfolio values, (not just with redemptions or inflows) and with gains of about 5% for many equity indexes, Artio might even surprise investors with positive news on "AUM" soon. If so, a big jump in the stock price could occur very soon.
Here are some key points for ART:
Current share price: $2.00
The 52 week range is $1.72 to $5.26
Annual dividend: 8 cents per share which yields 4.1%
NII Holdings, Inc. (NIHD) is a telecommunications company that is focused on providing voice services, data, and wireless Internet access in a number of Latin American countries. It has a major customer base in Brazil and it also offers services in countries like Argentina, Mexico, Chile and Peru. It currently provides 3G services in many of these countries and continues to expand services and upgrade its network.
At just over $6, this stock is trading for a fraction of the 52-week high, which is around $24 per share. It is also trading well below book value, which is about $17 per share. Investors have punished the stock price after the company posted losses which were due in part to increased competition and foreign exchange rates that have been unfavorable. However, the company could return to profits in the future as recent network investments start to potentially pay off. It has seen subscriber growth of about 14% from 2011 to 2012, and it has about 11.2 million subscribers. It has a decent balance sheet with about $1.69 billion in cash and around $4.64 billion in debt. While that is a significant amount of debt, it is at reasonable levels for the industry in which it operates. The debt level does increase risks for investors especially since the company has posted losses in recent months. However, the company has a solid cash balance which should allow the company to operate comfortably until it returns to profitability.
Investors who avoid this company simply because it has posted losses might be missing out on the big picture. NIHD has a very valuable network in many fast-growing emerging market countries. Some analysts think the company is undervalued and that could make it an attractive buyout candidate. A recent report by Morgan Stanley details which companies have a high chance of being a takeover target and NIHD makes the list. We have seen a number of major deals in the telecom sector in the past few months including a large investment deal into Sprint (S) by Softbank and even Sprint's deal for Clearwire (CLWR). Some investors who avoided Sprint or Clearwire shares because those companies posted losses missed out on some big potential gains as both of those stocks had major rallies off the lows. That is one more reason why investors should consider buying NIHD shares now. For those who want more information, Seeking Alpha's Jonathan Verenger provides an excellent analysis of this company in an article whereby he makes a very bullish sum-of-the-parts case for buying the stock.
Here are some key points for NIHD:
Current share price: $5.81
The 52 week range is $4.75 to $24.32
Annual dividend: none
Xerox Corporation (XRX) is well known for making great copy machines, but it also designs and manufactures printers, and it offers software, consulting, and IT business solutions to many Fortune 500 companies. This company has developed a number of innovations over the years through its research and development division called Palo Alto Research Center or "PARC." This business division has created breakthroughs which include encryption systems, solid-state lasers, optical storage and more. While Xerox might not be growing as fast as some technology companies, it owns over 9,000 patents and it continues to invest in research and development that could boost growth in the future. In 2012 alone, Xerox received 1,215 U.S. patents, which ranks it as one of the world's top patent recipients.
Xerox has been reporting solid financial results. For the fourth quarter of 2012, Xerox announced GAAP earnings of 26 cents per share and adjusted earnings per share of 30 cents. Xerox had revenues of $5.9 billion for the quarter and it saw growth of 7% in the services business which represents about 52% of total revenues. The document technology business, which represents around 42% of revenue, was down 8%.
Analysts expect Xerox to earn about $1.12 in 2013, so the stock trades for a price to earnings ratio of less than 8 times earnings. The average PE ratio for a stock in the S&P 500 Index is currently about 15 times or roughly double. It also looks cheap because it trades below book value which is $9.41 per share.
A number of analysts and investors have considered Xerox to be a possible takeover target in the past. Some of the potential suitors have been thought to be companies like Dell, Inc., Hewlett Packard (HPQ) or International Business Machines (IBM). Whether or not a takeover happens, Xerox shares look cheap compared to the rest of the market and with a solid balance sheet, the downside risks look limited although technology investing can be inherently more risky due to technological obsolescence.
Here are some key points for XRX:
Current share price: $7.96
The 52 week range is $6.10 to $8.55
Annual dividend: 17 cents per share which yields 2.1%
Advanced Micro Devices, Inc. (AMD) shares are trading for just a fraction of the 52-week high, which is $8.35. This company has been impacted by the rising popularity of tablets and mobile devices which has contributed to weak PC sales. Many investors had hoped that Microsoft's release of Windows 8, in late 2012, would ignite a PC upgrade cycle that would boost the fortunes for companies like AMD but Windows 8 sales have not been very impressive.
As a chipmaker, AMD faces significant competition from industry leaders like Intel (INTC), but for years it has managed to stay relevant. This company has posted losses recently, but it has continued to invest in the future and it could now be better positioned to take advantage of increased demand for smart phones and tablets. It recently developed the Trinity processor for increased speed, plus improved battery life and graphics. It will focus on the tablet market by launching the Tamesh processor in 2013. These new products could lead to improved financial results in the future.
Analysts are expecting AMD to post a loss of 31 cents per share for 2013, however, the consensus estimates are near break-even for 2014. While losses will increase risks, AMD has a decent balance sheet with about $1 billion in cash and around $2 billion in debt, and this offsets some of the risk.
AMD shares could be a higher risk investment in the tech sector, but the rewards could make it worthwhile. Plus, at just over $2 per share, the valuation could make this company a takeover target for another company, especially if the chip industry is at or near a bottom. Not long ago, speculation surfaced that a company like Qualcomm (QOM) could be a possible suitor for AMD, and in the past there was also speculation that Dell might be interested in buying the company.
Here are some key points for AMD:
Current share price: $2.60
The 52 week range is $1.81 to $8.35
Earnings estimates for 2013: a loss of 31 cents per share
Earnings estimates for 2014: a loss of 6 cents per share
Annual dividend: None
Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial