Looking for companies with strong balance sheets that are taking advantage of currently depressed share prices, I found companies trading below market valuations that were opportunistically buying back shares. I started by taking the S&P 500 and eliminating any company trading for more than ten times earnings or 6x EV / EBITDA. I then eliminated any company that hadn’t reduced shares outstanding by more than 2.5%. Only 7 companies made it through my screen as potential value investments.
|Ticker||Company||EV / EBITDA||P/E||Share Reduction|
|BBY||BEST BUY CO INC||3.53||8.40||-10.02%|
|FRX||FOREST LABS INC||5.03||8.07||-5.38%|
With an average EV / EBITDA of 4.5x and P/E well below 9, all these shares certainly look cheap. Management seems to think so too, having reduced the average company’s share count by almost 6%. That said, a couple of the names stick out a bit more than the others to me, so let’s take a deeper look into them.
Best Buy (BBY) and Gamestop (GME) – shares of these two companies have been crushed on fears of weaker consumer spending and competition from online retailers. However, both companies have histories of incredibly strong growth, great returns on capital, and fortress like balance sheets. Given Private Equity’s recent interest in the retail sector, don’t be surprised to hear either of them mentioned as a candidate for an LBO.
Dell (DELL) and Hewlett-Packard (HPQ) – both of these tech titans trade at a huge discount to the market and their peers due to fears over tablets and smart phones eroding their core consumer product lines. However, these fears may be overblown: Dell, for instance, derives just 1% of their operating profit from the consumer division. Regardless of what happens to their consumer divisions, these are two world class businesses with great balance sheets and long histories of growth and are trading at rock bottom prices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.