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In this installment of my analysis of recent purchases made by renowned investors and funds, I will analyze five major purchases recently made by Citadel Advisors in the technology sector during Q4 2011. The companies selected for analysis are shown below.

  • LSI Corporation (NASDAQ:LSI)
  • eBay (NASDAQ:EBAY)
  • Skyworks Solutions (NASDAQ:SWKS)
  • Polycom (NASDAQ:PLCM)
  • Constant Contact (NASDAQ:CTCT)

Outside of EBAY, most of the companies on the list are relatively unknown. LSI and SWKS both featured in the top 15 stocks purchased by Citadel during the last quarter. The fund also more than doubled its position in PLCM and practically initiated a new purchase in CTCT. In this article I will evaluate the fundamentals of these companies and perform relative valuation to determine the attractiveness of the companies at current levels.

Some basic information about the companies is presented in the table that follows:


Company Basics

LSI

EBAY

SWKS

PLCM

CTCT

Market Cap (Billion)

4.72

45.8

4.92

3.35

0.864

Debt to Equity Ratio

0%

9%

0%

0%

0%

Stock Performance 5 Yr

16%

15%

307%

21%

-1%

Stock Performance 1 Yr

35%

13%

-24%

-23%

0%

Dividend Yield

0.0%

0.0%

0.0%

0.0%

0.0%

eBay is by far the biggest company in the group with a market capitalization of $46 billion. CTCT, a provider of on-demand e-mail marketing, social media marketing, event marketing and online survey solutions for small organizations and businesses, is the smallest firm on the list with a market capitalization of less than a billion dollars. The company's stock has offered no returns during the last five years. In comparison, all other stocks on the list have provided positive returns to their shareholders with SWKS leading the way. However, SWKS and PLCM have both declined in value during the previous 12 months. Additionally, none of the stocks offers a dividend.

Next, I observed the historical growth rates of revenue, income and book value, and the projected long-term earnings growth rates. These are summarized in the table shown below:

Growth Rates

LSI

EBAY

SWKS

PLCM

CTCT

Revenue

10 Year

1%

25%

12%

12%

60%

5 Year

1%

14%

13%

17%

50%

1 Year

-20%

27%

32%

23%

23%

Income

10 Year

-

29%

-

18%

-

5 Year

14%

23%

-

14%

-

1 Year

728%

79%

66%

100%

700%

EPS

10 Year

-

28%

-

18%

-

5 Year

6%

26%

-

13%

-

1 Year

817%

81%

59%

92%

670%

Book Value

10 Year

-12%

16%

1%

5%

-

5 Year

-18%

12%

13%

8%

-

1 Year

-14%

18%

17%

14%

32%

Growth Projections

Next Year

28%

15%

11%

16%

28%

Next 5 Year

16%

13%

16%

18%

36%

LSI had a poor last year with revenue declining by 20%. However, net income shot up by 728%. All other companies experienced solid growth rates in excess of 23%. EBAY and PLCM are the only two companies to have not reported a loss during the previous 10 years. Going forward, CTCT is projected to grow at the fastest pace while EBAY is estimated to grow at a very respectable rate of 13%.

I also evaluated the return on invested capital and return on assets to compare the individual companies with their historical averages.

Operations

Averages

LSI

EBAY

SWKS

PLCM

CTCT

ROIC

10 Year

-11%

12%

-2%

6%

-2%

5 Year

-17%

13%

10%

7%

-2%

Last Year

28%

17%

15%

11%

16%

TTM

28%

17%

14%

11%

16%

ROA

10 Year

-9%

10%

-1%

5%

-48%

5 Year

-14%

10%

9%

5%

-1%

Last Year

14%

13%

13%

8%

12%

TTM

14%

13%

13%

8%

12%

Analyzing the returns on invested capital and assets, EBAY appears most impressive to me with an increasing average ROIC and ROA during the last 10, 5 and 1-year periods. LSI, SWKS and CTCT all reported negative average 10-year returns. However, the TTM ROIC and ROA are very impressive for LSI. CTCT also provided acceptable ROIC during the last financial year. PLCM's ROIC is low in my opinion.

Having developed a good idea about the fundamentals of the five companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples. The table below presents the valuation analysis results.

Valuation

LSI

EBAY

SWKS

PLCM

CTCT

Current Yr Estimate

$0.58

$2.29

$1.92

$1.34

$0.89

EPS Growth Rate

16%

13%

16%

18%

28%

Future EPS (5 Yr)

$1.06

$3.67

$3.42

$2.62

$2.39

Expected P/E

14.2

15

17

17.2

27

Price 5 Yrs Out

$15.02

$55.02

$58.09

$45.08

$64.51

Unlevered Beta

2.11

1.22

2.11

1.87

1.22

Debt

0

2.089

0

0

0

D/E Ratio

0%

5%

0%

0%

0%

Current Tax Rate

35%

35%

35%

35%

35%

Levered Beta

2.11

1.26

2.11

1.87

1.22

Risk Free Rate

2%

2%

2%

2%

2%

Risk Premium

6.00%

6.00%

6.00%

6.00%

6.00%

Size Premium

0.74%

-0.36%

0.74%

0.97%

1.62%

Cost of Equity

15.4%

9.2%

15.4%

14.2%

10.9%

Fair Value

$7.34

$35.47

$28.38

$23.22

$38.38

Current Price

$8.33

$35.59

$26.09

$18.90

$29.07

% Overvalued

12%

0%

-9%

-23%

-32%

As shown in the table above, CTCT and PLCM are significantly undervalued at current levels. LSI is modestly overvalued while EBAY is fair valued. CTCT appears most intriguing to me. However, EBAY has the best fundamentals in my opinion.

Source: Citadel's Tech Picks - 3 To Buy, 1 To Hold, 1 To Sell