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Shiraz Lakhi
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  • Dynamics Research Corp. (DRCO) Deeply Undervalued By Free-Cash-Flow-Yield, A Low PEG Ratio, And Analyst Estimates...
    By Shiraz Lakhi - Many investors who follow my articles & alerts here on Seeking Alpha, will know I look primarily for strong Free-Cash-Flow-Yield metrics, as a starting point for further analysis, on a potential stock trade, within a 'sector' which has become 'technically oversold'.

    By focusing on a cyclically oversold sector (continually tracking technology, consumer goods, services, and basic materials sectors) based on simple technical trend indicators, then drilling down to the specific stock(s) which represent the strongest fundamentals based on the Free-Cash-Flow-Yield 'starting point', investors can establish a solid basis for strong potential upside in the selected stock, which combines both technicals and fundamentals.

    One such company which appears on my radar is Dynamics Research Corporation (NASDAQ:DRCO). This 'business software & services' company currently generates free-cash-flow of $20.63 million on a trailing twelve month basis. Last nights close valued the business (Enterprise Value) at $133.81 million, hence returning a robust Free-Cash-Flow-Yield (FCF/EV) of 15.4%.

    DRCO Stock Chart Including Trend Indicator

    Additional metrics in favor of DRCO include: a low PEG ratio of 0.93, and consensus analyst mean target price of $19.83 (significantly above the current price). DRCO currently trades at $13.11 per share, around 34% below analyst estimates, and around 51% above its 52 week low.

    Note the emphasis on the Free-Cash-Flow-Yield. This simple to calculate metric measures the Free-Cash-Flow (or 'FCF') generated by a business, divided by the Enterprise-Value (or 'EV') of the company. The FCF is a superior, more accurate reflection of a companys ability to generate profits than the basic, out-dated earnings or EBITDA figure, which is often prone to tactical/questionable accounting. Similarly, the EV is a superior, more authentic reflection of the worth of a company, than the commonly used 'market-cap' figure which most investors take at face value. The EV, in simple terms, takes into account the company's debts and cash holdings, effectively 'revaluing' the business based on what a potential acquirer would theoretically pay, in other words, the 'true value' of a business.

    Hence, by dividing FCF by EV, we arrive at the Free-Cash-Flow-Yield. It is the percentage of 'true net income' a company generates relative to its 'true overall value'.

    Investors can quickly measure and identify potential undervalued plays as an excellent starting point for further analysis/diligence (looking at additional fundamentals such as PEG ratio, analyst estimates, long and short term debt, management competence, entrepreneurialism, innovation in product/service, whether the business operates within a growth or shrinking market and so forth), when selecting and short-listing potential plays.

    It is also valuable to seek out fundamentally superior stocks, at a time when the overall 'sector', or the general market as a whole (S&P index) becomes cyclically undervalued. There are numerous technical trend indicators which provides a basis to determining the overall market sentiment in any specific sector (such as technology), or the market (S&P), using readily available, free-to-use trend and oversold/overbought indicators. The key is to select an oversold sector, then drill down to the most fundamentally robust stock(s) within that sector.

    Wishing you every success in your investments, and good spirit...
    Shiraz Lakhi - Independent Investor/Publisher

    Enterprise Value/Free-Cash-Flow Data Sourced From Yahoo Finance. Stock Data & Performance Analytics Sourced From TradePilot.com.
     
    Jun 30 6:09 AM | Link | Comment!
  • Apple vs Netflix - Making A Case For What Could Emerge As The Perfect "Long AAPL/Short NFLX" Pair Trade...
    By Shiraz Lakhi - Independent Investor/Publisher - As a predominantly 'hedged' pairs trader, I am rarely inclined to trade outright long or short stock positions, being more comfortable (and profitable) placing funds into 'non directional' market neutral pairs trading ideas that have a proven track record of success.

    Such a strategy involves simultaneously trading an 'undervalued stock long', against another competing 'overvalued stock short', when the two stocks move out of 'sync'. Such statistical arbitrage (or pairs) trades are popular, tried and tested methods practiced by most true-to-the-spirit hedge funds, quant trading desks, and an increasing number of independent self-directed traders...

    The process involves application of statistical probability math on two closely related stocks which tend to move together 'most of the time', but 'temporarily' diverge. At some mathematically fixed 'extreme' point of divergence (using standard deviation), the pairs trader buys undervalued stock 'A', and shorts overvalued stock 'B', in equal dollar value, in anticipation of the pair reverting back to the 'mean'. This is a basic market-neutral trade based on statistical mean-reversion probability. The goal is to eliminate the broader market directional risk, and focus only on whether stock 'A' will outperform stock 'B'.



    Such an opportunity is presently unfolding in a pair I continually track within my pairs watchlist - Apple stock (NASDAQ:AAPL) versus Netflix (NASDAQ:NFLX). On a purely fundamental basis, AAPL is heavily undervalued 'relative' to NFLX (I have listed some of the core fundamental metrics below)...

    There is however, an additional, rare factor which can be attributed to this particular pair trade, which does not always appear in every pair I uncover - but when it does, provides for a compelling reason - a virtual no-brainer - to enter this pair trade without over analysis. While AAPL operates within a more diverse market of products and services than does NFLX, the almost inevitable, sustainable success of a certain service (the delivery of movies, television, streaming video, which Netflix depends upon almost exclusively) presently pursued in full flow by Apple, has a direct impact on Netflix, and provides added weight to the argument in favor of the long AAPL/short NFLX strategy.

    Focusing on the fundamentals, many investors who follow my articles/tweets will know I look primarily for strong Free-Cash-Flow-Yield metrics, as a basic 'starting point' for further analysis. This simple to calculate metric measures the Free-Cash-Flow (or 'FCF') divided by the Enterprise-Value (or 'EV') of a business...

    The FCF is a superior, more accurate reflection of a companies ability to generate profits, than the very basic, almost out-dated (at least by professional standards) 'earnings' or 'EBITDA' figure, which is often prone to tactical/questionable carry-back/forward accounting. Similarly, the EV is a superior, more authentic reflection of the 'worth' of a company, than the commonly used 'market-cap' figure. The EV, in simple terms, takes into account the companies debts and cash holdings, effectively revaluing the business based on what a potential acquirer would theoretically pay (the 'true' value)...

    By dividing FCF by EV, hence calculating the Free-Cash-Flow 'Yield', investors can quickly measure and identify potential 'undervalued' plays as an excellent starting point for further analysis/diligence (looking at additional fundamentals, long and short term debt, management competence, entrepreneurialism, innovation in product/service, whether the business operates within a growth or shrinking market, and so forth).

    Moreover, the Free-Cash-Flow-Yield allows quick 'comparison' between several competing stocks (or stocks which directly affect 'mutual' cause-and-effect markets, as in the case of AAPL/NFLX), which, with a little intricate research, starts to unfold some interesting, highly compelling potential market-neutral hedged pair trading opportunities...

    At the time of writing, the current Leveraged Free-Cash-Flow figure for AAPL stands at $17.41 Billion, with Enterprise-Value being $272.56 Billion. The Free-Cash-Flow-Yield for AAPL is hence 6.38%. At the same time, the current Leveraged Free-Cash-Flow figure for NFLX stands at $421.82 million, with Enterprise-Value being $13.39 Billion. The Free-Cash-Flow-Yield for NFLX is therefore 3.15%, almost half of AAPL, providing AAPL plenty of upside 'relative' to NFLX.

    Note, with pairs trading, I am not concerned in the least about the overall market direction, whether we are in a bull or a bear market - this is irrelevant - my only point of focus is whether AAPL will outperform NFLX. Even if both stocks tank, but NFLX drops more than AAPL, a net profit is produced.

    Additional metrics in favor of the long AAPL/short NFLX trade include the Price-To-Earnings-Growth (or 'PEG') ratio with AAPL exhibiting an ultra-low PEG of just 0.74 (compared to NFLX PEG substantially higher at 2.58), the Forward P/E ratio (11.34 vs 39.29, in favor of AAPL), the Price/Book ratio (4.91 vs 49.04, in favor of AAPL), and the Debt/Equity ratio (0.00 vs 0.85, in favor of AAPL).

    Pairs trading is an ideal strategy if you don't want to play AAPL long as an outright directional trade. Many investors sit on the fence, despite knowing the undervalue opportunity AAPL currently offers - anxious about the overall market sentiment, which can (and does) effectively drive many otherwise solid stocks, including Apple, into extended bear market negativity. With a pair trade, much of the directional market uncertainty is neutralized...

    By trading stock pairs, whether based on bread-and-butter mean reversion statistical probability (when pairs move outside the mean by 2 standard deviations), or fundamental comparison metrics (such as the AAPL/NFLX pair trade idea), the goal is to insulate against the wider market risk/volatility. Pairs traders are not concerned about overall market sentiment or direction. It does not matter if the stock market (or a sector) rallies, declines, or crashes. The only objective is that stock A outperforms stock B...

    If you are long A and short B, and the specific industry sector (or the entire stock market) pops, then the loss on the long position in stock A, would be generally counter-balanced by the profitable short position in stock B. The objective is, over time, the fundamentally superior stock will tend to outperform the weaker, allowing the astute pairs trader to keep his/her head when it seems, all others are losing theirs. I am long AAPL, short NFLX, equal dollar value either side.

    Wishing you every success in your investments... and good spirit...
    Shiraz Lakhi - Self-Directed Investor/Publisher

    Enterprise Value/Free-Cash-Flow Data Sourced From Yahoo Finance. Stock Data & Performance Analytics Sourced From TradePilot.com
     
    Jun 27 6:16 AM | Link | 3 Comments
  • Does The Recent Pullback In TNAV Offer A Compelling Opportunity To Load Up On This Stock?...
    Does The Recent Pullback In TeleNav Inc (NASDAQ:TNAV) Offer A Compelling Opportunity To Load Up On The Stock?...

    By Shiraz Lakhi - Self Directed Trader/Publisher

    A recent pullback saw the shares of TeleNav correct around 20% from the 52 week high, starting early June 2011. On closer analysis, could this recent, much needed pullback - largely engineered by overall market sentiment in the broader market/indexes - offer a good buying opportunity for such progressive, cash rich companies as TNAV...

    In my research, I look for stocks with a minimum market capitalization of $50m, which are trading above 60% of their 52 week low, and present a strong 'fundamental' bias to the upside. Looking at TNAV clinically, revealed some very interesting (and compelling) metrics...
     
    Firstly, a little info about the company: Headquartered in Sunnyvale, California, TeleNav, Inc (TNAV). primarily offers location based services for consumers and enterprises in the US and internationally, providing GPS Navigator, a voice guided, real time mobile navigation service, which delivers live traffic alerts, route planning, and updated points of interest...

    The company offers GPS Navigator on a 'white label' basis, such as sprint navigation and AT&T navigator under the TeleNav brand. The company also provides enterprise-centric solutions such as mobile resource management solutions, which helps monitor and manage mobile workforces and assets by using its location based services platform to track job status and the location of workers, field assets, equipment, etc. The company also focuses increasingly on developing location based services for mobile phones, including location based mobile advertising, commerce, and social networking, a fast growth sector, requiring carefully managed products to develop niche advantages.
     
    Focusing on fundamental metrics, what I look for as a core measure, before shortlisting any stock as potential play, is the 'Free-Cash-Flow To Enterprise Value'. In the case of TNAV, this is presently (largely due to the pullback) asignificant (I am tempted to say 'phenomenal') 30.69%.

    This means that the cash-flow (true profit booked into the account - see next paragraph) is over 30% of the true value of the company. This is an enterprise where around $4.42 of its $14.43 stock price is 'pure cash flow' generation...
     
    Note, the 'free cash flow' (NYSE:FCF) metric is a more accurate measure of a companies 'earnings', as it reflects the true operational performance (generation of actual cash profits) of a business. This eliminates any potential misrepresented accounting, or dubious 'non-operational' entries into the profit/loss statements.
     
    The 'enterprise value' (NYSE:EV) metric is a more accurate representation of what a company is 'worth'. Many investors simply take the 'market cap' as a determination of a companies value. This is flawed, as it does not account for debt and cash the company may hold. A potential buyer would only pay the true worth of a business, which is the market capitalization PLUS debt (the acquirer would have to buy the debt), MINUS cash (the acquirer, once the company is purchased, also gains the cash reserves).
     
    Hence, unlike the commonly observed P/E ratio (which is based on the very basic, and questionable 'market cap' and 'earnings' metrics), the FCF/EV ratio more accurately represents the amount of true earnings a company produces as a ratio (or percentage) of the true worth of the business.
     
    In the case of TNAV, the current free-cash-flow generated is $119.37m, and the enterprise-value is $388.89m. Hence the FCF/EV ratio is 0.3069 (or 30.69%).

    Additional 'positive' fundamental metrics in favor of TNAV include a Price-to-Earnings-Growth (NYSE:PEG) ratio of 1.34, zero debts on the balance sheet, over $210m in cash (on balance sheet), year-on-year sales growth over the last 5 years. Even if the sales drop, the most supportive metric in favor of the business remains the cash-flow-to-enterprise-value.

    The stock is currently priced at $14.43 (pre-open Monday 13th June 2011), which is 210.3% above the 52 week low.

    Wishing you every success in your investments... and good spirit...
    Shiraz Lakhi - Self-Drected Trader/Publisher

    Enterprise Value/Free-Cash-Flow Data Sourced From Yahoo Finance. Stock Price, Technical & Performance Analytics Sourced From TradePilot. View Shiraz Lakhi's Daily Trading Blog Here (Latest Articles Based On FCF/EV Yield).
     
    Jun 13 4:31 AM | Link | Comment!
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