Despite what efficient market theory may suggest, Barron's occasionally offers interesting ideas for value-oriented investors. It has long been my view that value opportunities are often provided to investors because of the market's structural bias toward short-term results even if long-term prospects look solid. As such, actionable ideas can be found even in one of the most widely circulated investment publications in the country.
This week's issue brought four names to my attention which I then evaluated on my standards, primarily focusing on free cash flow.
Buffalo Wild Wings (BWLD) is mentioned as a possible play on the successful resolution of the NFL lockout by Deutsche Bank analyst Jason West via Barron's "The Trader" column. The general thesis is that NFL games drive traffic to bar-and-grill establishments. A plausible theory to be sure, but judging from its free cash flows, BWLD is definitely a growth stock story, with investors betting that future earnings will justify today's valuation. The stock is priced at 123 times its annual free cash flow average over the last five years.
Moody's (NYSE:MCO) makes an appearance in the "13D Filings" column due to being a new investment position by an investment fund, ValueAct Capital. For those inclined to piggy-back on renowned investors' work without conducting in-depth research, one could do worse than follow ValueAct, which has generated stellar returns historically due to a value-oriented style and a willingness to become activist shareholders if the situation warrants. Its intentions regarding MCO are unclear for now, but my survey of MCO presents a mixed picture. Historically, Moody's is a cash flow machine, generating an astounding 36% FCF on its asset base. However, much of this prowess has abated in the wake of the rating agencies' scandal involving the housing debacle and recent years have seen FCF generation moderate to roughly 20% of assets in the years post-crisis. To be sure, those figures are still impressive, but if these hold as the new run-rate, I judge MCO to be fairly priced at these levels.
The ever-savvy Michael Santoli brings up the country's two leading home-improvement retailers, Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), as possible investment opportunities. Evaluated in isolation, both HD and LOW appear to be priced appropriately relative to free cash flow generated with Home Depot perhaps a tad overpriced compared to its smaller competitor. In fact, this is the basis of Santoli's idea, a long-short trade which expresses the view that HD is unjustifiably valued at a premium over LOW. However, HD's longer track record of consistent free cash flow may warrant some premium over the upstart LOW, which has only generated sizable FCF in the last 2 years over a heavy period of capital investment.
A brief summary table of the stocks discussed follows below. Readers can find an in-depth financial ratio spreadsheet here.
|COMPANY||Current Price||52 week range||Market Cap||Yield||PE||Payout Ratio||EV / EBITDA||Debt to EBITDA|
|Buffalo Wild Wings Inc||$63.38||39.90 - 69.52||1.163B||N/A||26.35||N/A||9.82||0.00|
|Moodys Corp||$34.97||20.72 - 41.93||7.998B||0.465 (1.31%) ex-div:"May 18"||13.45||17%||8.64||1.27|
|Home Depot Inc||$34.00||27.10 - 39.38||54.136B||0.972 (2.78%) ex-div:"Jun 14"||16.78||46%||8.43||1.40|
|Lowes Companies Inc||$21.02||19.35 - 27.45||27.369B||0.47 (2.18%) ex-div:"Jul 18"||15.19||31%||6.26||1.25|
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.