The shareholders of Quest Software, Inc. (QSFT) are too optimistic. QSFT shares closed at $24.07 Friday after Insight Venture Partners agreed to pay $23 per share for the company. Apparently market participants believe there is more of a chance of a higher deal price being found than there is of the deal falling through. Should enthusiastic investors pay a negative deal spread based on their belief in a particular firm?
No, such hopefulness relies on the current deal terms being discarded, followed by the proposal and acceptance of better terms from another takeover deal. Investors should avoid such exuberance and focus on fundamentals. Fortunately, QSFT is not the only stock in the world, and there are plenty more with better financial metrics.
Investment returns are ultimately dictated by future earnings and future cash flows, not enthusiasm. The future financial potential of a stock can be gauged by using financial metrics to determine how cheaply a stock is priced, its ability to weather hardship, and its growth potential.
As alternatives to QSFT, consider the following stocks with strong track-records and solid credit scores:
10-Year Average ROE
Farm & Construction Machinery
CACI International Inc.
Crown Crafts Inc.
Textile - Apparel Clothing
Oil & Gas Refining & Marketing
ICF International Inc.
KapStone Paper and Packaging
Paper & Paper Products
Nash Finch Co.
Quanex Building Products
General Building Materials
Data Storage Devices
Quest Software Inc.
Business Software & Services
These alternative stocks are all categorized as "safe" according to the Altman Z-score,* indicating that they are not considered bankruptcy risks. Moreover, the average 10-year equity returns demonstrate these firms have grown shareholder wealth at respectable annual rates. It is clear from these two metrics that each of these ten alternative stocks is a "high" quality stock capable of weathering bad times and delivering positive long-term results.
What's more, these stocks are cheaper and have better growth prospects than QSFT:
EPS growth past 5 years
EPS growth next 5 years
These stocks are cheaper than QSFT based on lower price multiples. What's more, they have better growth prospects according to analyst projections and growth trends. Rather than restrict yourself to concentrated investments in one notable stock like QSFT, consider a diversified mix of these ten securities as a more attractive alternative.
At the very least, the market prices of these stocks do not force you into paying for imagined increases to existing deal terms.
*Please read the article disclaimer.