The Omaha Principle: Tyco Undervalued

It’s been following the market almost exactly, rising and falling with the Dow, until two weeks ago, when shares of Tyco (NYSE:TYC) began a headlong crash, plummeting more than 26% in less than 11 trading days.

If you’re looking for a news-related collapse, you won’t find one here. The only thing Tyco has done in the last month was register to sell "from time to time an indeterminate amount of debt securities, preference shares, common shares, purchase contracts, depositary shares, warrants, units and guarantees of debt securities" (thank you, Dow Jones and Reuters for the quote).

That’s hardly incendiary.

Trading volume has remained steady throughout the fall, and the company’s fundamentals are still solid. Tyco just raised its quarterly dividend 33%. And the company actually moved up its fiscal-2008 guidance about 10% in July.

Tyco owns international alarm security company ADT (to be fair, I have to tell you that we’ve used their alarm system in our apartment for the last two years, but that has little to do with the share price.).

The company sells fire protection products (fire alarms, sprinkler systems and specialty fire extinguishers, among other things) and commercial security devices (closed-circuit TV cameras, ink tags for store merchandise and building keycard entry systems) in a collection of eight other subsidiaries.

The security and protection racket isn’t going to suffer from a recession. In fact, as crime rises (which happens in a recession), so do the number of home security systems and building alarms.

This stock shouldn’t stay down for long. It’s been trading at between $40 and $50 for the last year. And according to the Omaha Principle, this is exactly when we should be buying shares: TYC is a steal at $30 (but give it a few days, you may be able to get in even cheaper).

Tyco is another example of good shares gone bad because of market influences. The company is solid. The share price will return to normal levels.

And I’m not the only one who thinks so. Zacks, Fitch and Standard and Poor’s have all rated Tyco as undervalued in the last month. So as soon as the stock looks like it’s found a bottom, grab shares and be in as Tyco returns to its former glory.

Disclosure: none