Long Rimage Corporation (RIMG) With Short S&P Hedge

By Shiraz Lakhi – Original Article Posted 06/12 Seeking Alpha – Holding Long Rimage Corporation (RIMG) Dollar-Neutral Hedged By Short S&P Index ETF (SPY)

Currently holding a long position in Rimage Corporation (RIMG) on strong cash flow reserve. The business maintains a significant cash flow which can be distributed via dividends or re-invested in acquisitions, research & development, or transitioning into cloud technology based data-transfer. Basic ‘strong fundamental’ argument to the upside (read the full article by clicking below image) is founded on an extraordinary 64% free-cash-flow-yield. The long position in RIMG is fully hedged via a dollar-neutral long stock/short S&P pair trade, in anticipation of RIMG outperforming the S&P…

Rimage Corporation, a technology company operating within the computer peripherals industry, generates a current free-cash-flow of $12.07 million (based on trailing 12 month data), with an enterprise-value of $18.58 million. The free-cash-flow-yield (FCF/EV) is hence 64.9%. Additional positives in favor of RIMG include zero long & short term debt, 5 year average ROE exceeding 10%, a book-to-market (based on historical cost) of 0.94, and a bullish analyst mean target of $17 per share – by Shiraz Lakhi.

 

Long Northrop Grumman (NOC) With Short S&P Hedge

Original Article Posted 06/12 Seeking Alpha By Shiraz Lakhi – Northrop Grumman (NOC) Offers Strong Upside Potential Based On Robust Free Cash Flow Yield

I am currently long Northrop Grumman (NOC), dollar-neutral hedged by the S&P 500 index ETF (SPY), in anticipation of NOC outperforming SPY over the next 3-4 weeks. Northrop Grumman Corporation, a conglomerate operating within the aerospace and defence technology industry, generates a current free-cash-flow of $2.08 billion (based on trailing 12 month data), with an enterprise-value of $19.55 billion. The free-cash-flow-yield (FCF/EV) is therefore a solid 10.6% (implying undervalue based on yield), which offers deep value relative to peers within the same industry. Additional data in favor of NOC include a low PEG ratio of 1.21, a price/sales ratio of 0.57, institutional favored ownership exceeding 90%, and low book-to-market of 0.65 – by Shiraz Lakhi.

Long Cisco Systems (CSCO) With Short S&P Hedge

New Trade Idea – Long Cisco Systems (CSCO) Hedged With Short S&P Index Pair Trade In Anticipation Of CSCO Outperforming The S&P 500 Index – Alert Published 06/12 Shiraz Lakhi

I am currently long Cisco Systems (symbol: CSCO), based on strong fundamental argument to the upside (click on article below, to view analysis). The long position in CSCO IS fully hedged via dollar-neutral long CSCO/short SPY pair trade strategy, in anticipation of CSCO outperforming the S&P 500 index.

Cisco Systems, a tech company operating within the networking and communication devices industry, generates a current free-cash-flow of $9.25 billion (based on trailing 12 month data), with an enterprise-value of $58.1 billion. The free-cash-flow-yield (FCF/EV) is therefore 15.9%, offering strong upside. Additional positives in favor of CSCO include a book-to-market (based on historical cost) of 0.55, a low (relative to industry) price/cash ratio of 1.96, and a low debt/equity ratio of 0.81 – by Shiraz Lakhi.

Long TAM S.A (TAM) With Short S&P Hedge

Brazilian TAM S.A (TAM) Offers Solid Upside On Robust Free Cash Flow Yield – Currently Holding A Long Position In TAM With S&P Hedge – Original Idea Posted 06/12 Seeking Alpha By Shiraz Lakhi

With a 22.9% free-cash-flow-yield cushion, TAM offers strong upside, despite the current downturn in the airline industry. Operating within the major airlines industry (Brazil), TAM generates a current free-cash-flow of $462.8 million (based on trailing 12 month data), with an enterprise-value of $2.02 billion. The free-cash-flow-yield (FCF/EV) is hence a strongly bullish 22.9%. Additional metrics in favor of TAM include a low price/cash ratio of 2.98, return on equity (ROE) of 47.87% (based on trailing 12 month data), a low price/sales ratio of 0.48 (consensus bullish), and a low (relative to industry) debt/equity ratio of 4.28. I am long TAM, with a dollar-neutral hedged short position in the S&P index ETF (symbol: SPY), in anticipation of TAM outperforming the S&P – by Shiraz Lakhi.

Long Computer Sciences (CSC) With Short S&P Hedge

Computer Sciences Corporation (CSC) Vs S&P 500 Index (SPY) Offers Opportunity For Market-Neutral Hedged Pair Trade – Original Alert Posted 06/12 Seeking Alpha By Shiraz Lakhi

I am currently long Computer Sciences Corporation (CSC) with a dollar-neutral short S&P (SPY) hedge, wagering on CSC outperforming SPY over the next 4-6 weeks. Computer Sciences operates within the information technology services industry, and currently generates a free-cash-flow of $1.01 Billion (based on trailing 12 month data), against an enterprise-value of $6.61 Billion. The free-cash-flow-yield (FCF/EV) is a healthy 15.3%, offering significant upside potential. Additional data in favor of CSC include a low PEG ratio of 0.91, low price/book of 0.76, a book-to-market of 1.32, and analyst mean target of $43.85 per share – by Shiraz Lakhi.

TeleNav (TNAV) Moving Higher On Strong Volume

TeleNav (TNAV) Continues To Gain Upward Momentum On Strong Volume, Despite The Broader Market Downturn (Original Alert Issued 06/14) – By Shiraz Lakhi.

Following my recent article published on Seeking Alpha, shares in TeleNav (TNAV) have been moving higher, currently trading at $16.57/share, originally (at time of publication) at $14.43, up 14.8% in 9 days.

There is justification for this. The company still has plenty of upside, as the current free-cash-flow-yield, upon which the initial analysis was founded, remains at around 25%. Additional positive fundamental metrics in favor of TNAV include a price-to-earnings-growth 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 five 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 moving higher on consistently strong volume, despite the overall market downturn. I am long TNAV (fully hedged by short SPY).

Wishing you every success in your investments. And good spirit…

Shiraz Lakhi – Independent Investor/Entrepreneur

The Long Stock/Short S&P Pair Trade

How To Minimize ‘Directional’ Risk, By Entering ‘Long’ The Undervalued Stock, And Simultaneously  ‘Shorting’ The S&P 500 Index - By Shiraz Lakhi.

There are two ways of trading stocks – either ‘single-directional’ (long-only, or short-only) speculative positions, which anticipates a selected stock moving in a particular direction along with the rest of the market, or a ‘comparative’ position, which anticipates a selected stock ‘outperforming’ the general market as whole (such as the S&P 500 index).  The latter, provides an advanced, market-neutral method of trading, which wagers on the stock doing ‘better’ than the S&P index, irrespective of whether the particular stock moves up, down, or sideways…

For the investor who wants to advance beyond the conventional, single-directional speculative (‘long-only’ or ‘short only’ positions) trade, and more critically, protect his/her position against the broader market directional risk (corrections, crashes, prolonged negativity), the long stock/short S&P pair trade provides resolve. The strategy involves taking a ‘long’ position in a stock the trader believes will increase in value, while taking a simultaneous ‘short’ position in the the S&P 500 index ETF (symbol: SPY)…

More popularly coined pairs trading, this particular strategy (entering long the stock and shorting the S&P) wagers on the stock ‘outperforming’ the S&P index. Put simply, the investor is not concerned about whether the selected stock will move up or down, but how it will do ‘relative’ to the overall market (S&P). By entering a long position in stock X (preferably one which exhibits robust fundamentals, such as a high free-cash-flow-yield, amongst additional undervalue metrics) and simultaneously entering a short position in the S&P index, in exactly the same dollar value (in other words, if you enter long $30,000 XYZ stock, you would short $30,000 SPY), investors can establish a ‘dollar-neutral’ market-hedged position.

Effectively, no matter which way the overall market moves, whether it corrects, crashes or rallies, direction is of no relevance. In a pairs trade, the single point of focus is purely whether stock X will outperform the S&P. If both the stock and the S&P fall, as long as the stock declines less (in percentage terms) than the S&P, the trade results in a profit. If both the stock and the S&P rise, as long as the stock rallies more than the S&P, the trade results in a profit. Only if the stock ‘underperforms’ relative to the S&P does the trade result in a loss. The objective is, over time, the fundamentally superior stock will tend to outperform the market (S&P index).

Wishing you every success in your trading… and good spirit…

Shiraz Lakhi – Independent Investor/Entrepreneur

Intelligent Investing With The Free-Cash-Flow-Yield

How To Use The “Free-Cash-Flow-Yield” Metric To Capture The Strongest, Most Fundamentally Undervalued Stocks – By Shiraz Lakhi.

Most investors who focus purely on ‘technical analysis’ as a basis to make trading decisions ignore and overlook the ‘fundamental’ values within the stocks they are trading. That’s a mistake, and one which, with a little forward planning, and a few minutes of additional time commitment, can be easily avoided. By maintaining a ‘watchlist’ of the most ‘undervalued’, fundamentally superior stocks, using a few simple, finely tuned metrics, investors are in a much better position to profit from these specific pre-qualified stocks using, as an ‘added’ measure, technical ‘timing’ signals. Better yet, investors will significantly improve the odds of finding the undervalued home-run stocks that provide the best returns.

Whenever I look for a company to invest in, I make it a rule to ‘initially’ focus only on ‘fundamentals’. The key metrics I need to see, which instantly tell me whether a company is worthy of trading (or not) include positive revenue growth year-on-year (which compares the current quarter results to the same quarter the previous year), positive operating income growth (or EBIT) year-on-year, operating ‘margin’ growth year-on-year, and long-term-debt versus working capital (short-term-assets minus short-term-liabilities). This particular metric looks for long-term-debt to be below working capital, and instantly red-flags any company with excessive leverage, which I prefer to avoid. The information for all of the above are readily available via a number of free financial portals, including both Google Finance and Yahoo Finance.

In addition, one of the core metrics I utilize, to fine-tune the fundamental side of my analysis, is to measure the ‘free-cash-flow’ relative to the ‘enterprise-value’ of a company. The process begins by screening an initial universe of around 1,500 US stocks, listed on the NYSE, Nasdaq, and Amex, in order to isolate only those companies with a minimum market-cap of $30m, positive operating income (loss making businesses are removed), and a minimum free-cash-flow-yield of 10% (you will learn more on this in a moment). In addition, I screen for companies which have produced year-on-year revenue, operating income, and operating margin growth, as well as maintained long-term-debt below working capital. This screening process quickly narrows down the original universe of 1,500 stocks, to around 30-40 companies I can practically focus on…

At this point, financial stocks are removed, as are gold/silver stocks, biotechnology companies, and coal stocks. At the core of this particular strategy, as mentioned, is the minimum 10% qualifying ‘free-cash-flow-yield’. This is calculated by dividing a companies free-cash-flow by the enterprise-value. Both the ‘free-cash-flow’ and ‘enterprise value” data points are readily available for most all US stocks, via Yahoo Finance, under ‘key statistics’ (click here for an example snapshot)…

The enterprise-value (EV) is a more accurate version of the commonly used ‘market-cap’. EV measures the true value of a company, from the perspective of a potential buyer of the business. By taking the market capitalization value of a business, then adding the debt, and subtracting the total cash, you get a more exact reflection of what the business is genuinely ‘worth’, and more crucially, what a potential buyer would consider paying to acquire the business. Think about this. A potential buyer of the company would not pay the market cap, but would have to also pay for any debt the company has outstanding, minus keeping any cash.

While the EV provides a valuable indicator of the true ‘worth’ of a business, the free-cash-flow (FCF) provides an indication of the true ‘earnings’ power of the business. The FCF is a more superior, accurate reflection of a company’s ability to generate cash (real, booked profits from actual core operations), than the commonly presented ‘earnings’ data regularly reported within the financial press/media. Net earnings (and the EPS) are flawed metrics, subject to manipulation and bias by management who are more motivated to ‘impress’ rather than exhibit the true operational integrity of a business. There are numerous metrics professionals utilize instead of the ‘net earnings’. These include ‘operating-income’, or similarly, ‘earnings-before-interest-and-tax’ (also known as EBIT), and of course, the ‘free-cash-flow’. All three metrics provide for a more accurate measure of the companies’ earnings than the commonly quoted net earnings and earnings-per-share (EPS).

Relying only on the much touted ‘earnings’ data carries considerable added risk for investors. Earnings can often be subject to questionable accounting tactics, which can obscure the true reflection of ‘operational’ performance, for instance, tactical accountancy can carry forward (and backwards) figures which results in vague information at best. Any serious investor would be doing him/herself an injustice by not delving deeper into the accounts, and relying purely on ‘net’ earnings (or EPS) data.

With regards to the free-cash-flow metric, note, that this figure is also readily available (just like the enterprise-value) for any US listed stock, via Yahoo Finance, under ‘key statistics’. Armed with the FCF value and the EV value, an investor can quickly, and accurately measure the ‘percentage free-cash-flow yield’ a company generates, by dividing the free-cash-flow (FCF), by the enterprise-value (EV), multiplied by 100…

Looking at this in simple terms, assume you are in the market to buy a running business. You look at business “A” for which the owner wants to be paid $70,000 (the ‘price’). On it’s books, the company owes money, to the tune of $40,000 (‘debt). On the plus side, the company also holds some cash reserve of $15,000 (‘cash’)…

So, you do a quick calculation, and see that, in order to acquire the business, you would need to pay the owner his $70,000, add to this the debt which you are taking on, amounting to $40,000, and keep the cash already on the books, totaling $15,000. Therefore, the total ‘true’ cost to acquire the business, better known as the “enterprise-value” is $95,000 (that is $70,000 price ‘plus’ $40,000 debt ‘minus’ $15,000 cash).

Next, you study the companies accounts and see the pure, free-cash-flow generated in the business, which amounts to $18,000. From this data, you see that, for company “A”, the FCF/EV is 0.1894 ($18,000/$95,000). In other words the true percentage ‘yield’ (or the free-cash-flow-yield) is precisely 18.94%. All things equal, for your investment of $95,000, you can expect an 18.94% return.

Another example. You look at another competing business in the same industry, company “B”, for which the owner wants to be paid $110,000 (the ‘price’), plus the debt which the business owes, to the tune of $75,000 (the ‘debt’). In it’s books, the company also holds some cash reserve of $12,000 (the ‘cash’). So again, you do the same simple math, to discover if company “B” offers better value proposition…

You see that, in order to acquire the business, you would pay the current owner her $110,000, add the debt, amounting to $75,000, and keep the cash, totaling $12,000. The net cost to acquire the business (the “enterprise-value”) is $173,000 (that is $110,000 price ‘plus’ $75,000 debt ‘minus’ $12,000 cash).

Once again, you look at the company accounts and see the pure, free-cash-flow generated in the business, which amounts to $37,000. From this data, you punch in the numbers and see that, for company “B”, the FCF/EV ratio is 0.2138 ($37,000/$173,000). In other words the true percentage ‘yield’ (or the free-cash-flow-yield) is 21.38%. All things equal, for your investment of $173,000, you can expect a 21.38% return.

Based purely on these metrics (always subject to further analysis and due diligence), company “B” looks to offer a better value investment opportunity (more ‘undervalued’, by offering a higher ‘yield’) than company “A”.

The free-cash-flow-yield removes much of the defect and questionability inherent in the commonly viewed P/E ratio, and provides a more transparent, mature measurement, from within which individuals can more accurately evaluate equity investments. Moreover, the ‘comparisons’ of free-cash-flow-yield between various competing businesses operating within the same industry, provide an excellent starting point for potential investing ideas when you are looking to ‘pick’ specific stocks within a specific industry or sector.

The free-cash-flow-yield, is one of the three metrics I prefer to utilize in the fundamental side of my research, in order to find qualifying businesses, before applying any technical analysis. The other two metrics are, as mentioned above, the ‘operating-income-to-market-cap’ (which I call ‘operating yield’) and the ‘EBIT/market-cap’ (‘earnings-yield’ based on EBIT). Any one of these three key metrics, applied to a list of companies operating within the same industry, delivers valuable insights into the specific companies I want to invest in.

Added to this, investors can implement a fully hedged long stock/short S&P pairs trading strategy which wagers on the undervalued stock outperforming the S&P index (overall market) without anxiety about market direction.

To summarize, no matter which method you utilize towards seeking out potential stock investment opportunities, be it technical analysis, fundamentals, or a ‘mix’ of the two, it is a good idea to get back to the basics, the nuts and bolts of the ‘operational performance’ (FCF), relative to the ‘true worth’ (EV), of a business, as expressed by the simple-to-calculate, and demonstrated free-cash-flow-yield metric.

Investing in a company, whether short, medium or long term, is no different to buying into a business, which is effectively, precisely what you are doing. As an investor, you need to know what profits are being generated from the ‘operation’ of the core business. If the business generates $50m free-cash-flow, and the enterprise-value is quoted at $800m, then the yield is 6.25%. By comparing this to other businesses within the same industry, you will begin to identify potentially undervalued and overvalued businesses. These simple metrics, more often than not, are the very starting point for evaluating potential mergers & acquisitions.

Wishing you every success in your trading… and good spirit…

Shiraz Lakhi – Self Directed Investor/Entrepreneur

Price/Free-Cash-Flow Vs. Price/Earnings

How To Measure The True Operational Performance (Profitability) Of A Business Using The Price/Free-Cash-Flow (P/FCF) Ratio – By Shiraz Lakhi.

In the previous article, I discussed the advantages of using ‘enterprise-value’ as a superior, more exact method of determining the true ‘worth’ of a business, as opposed to the market-cap figure. The enterprise-value is what a potential acquirer would theoretically pay to take over a business. Similarly, the buyer/investor would also want to know more detailed aspects of the company’s ability to general cash-flow and profits.

Many traders and investors are already familiar with the popular price-to-earnings ratio (or P/E ratio), which provides some instantaneous, convenient measure of how the earnings-per-share compare to the stock price of a company. For instance if the share price of a company is $2.00, and the earnings for the year are 20 cents per share, then the P/E ratio is 10 (price/earnings). The P/E can then be compared with other companies in the same sector/industry in an effort to discover ‘undervalued’ or ‘overvalued’ stocks. If company A has a P/E ratio of 8 and company B has a P/E ratio of 12, then company A appears to offer better ‘value’.

There is however, a significant flaw with the P/E ratio. The ratio depends on the ‘price’ and the ‘earnings’ figure, both of which are not the truest reflection of what a company is ‘worth’ (price) or whether it is genuinely ‘profitable’ (earnings), in the strictest ‘operational’ sense. In this article, I will address the ‘earnings’ part of the equation.

Many less sophisticated investors take the earnings-per-share figure as a reflection of the profitability of a company. Relying on the much touted ‘earnings’ data carries considerable risk for investors. Earnings are often subject to dubious accounting tactics, which can disguise the true reflection of operational performance – for instance, tactical accountancy can carry forward (or backwards) irrelevant (non-operational, and non-recurring) entries which results in a flawed earnings figure.

There is of course, a more recent version of earnings, known as EBITDA (Earnings before Interest, Tax, Depreciation & Amortization). This metric has become popular, aimed at replacing the over-simplistic ‘earnings’ data, but again, the EBITDA also contains various noted flaws and does not remove the potential risk of questionable accounting. This is why, the only true, untainted, reflection of a companies ability to generate cash (profits), is via the “free cash flow” metric. Traders can view the ‘Free Cash Flow’ data for any business, via data providers such as Bloomberg, Thomson, and Yahoo Finance (simply enter any symbol, and hit ‘key statistics’).

In my own trading,  I utilize the ‘enterprise-value’ metric, as part of my analysis to work out the free-cash-flow-yield. The free-cash-flow-yield is simply the free-cash-flow (a truer measure of earnings) divided by the enterprise-value (a truer measure of the market-cap). This key metric allows me to instantly identify potential trade ideas, taking into account superior, more accurate metrics than the very basic, questionable stock-price and earnings-per-share. The objective is to identify and shortlist fundamentally robust, undervalued stocks which exhibit a high free-cash-flow-yield, relative to competing businesses within the same industry.

Wishing you every success in your trading… and good spirit…

Shiraz Lakhi – Independent Investor/Entrepreneur

Enterprise-Value Vs. Market-Cap

How To Measure The True “Intrinsic” Value Of A Company – Why “Enterprise-Value” Determines The Genuine Worth Of A Business – By Shiraz Lakhi.

Many traders and investors are already familiar with the popular price-to-earnings ratio (or P/E ratio), which provides some instantaneous, convenient measure of how the earnings-per-share compare to the stock price of a company. For instance if the share price of a company is $2.00, and the earnings for the year are 20 cents per share, then the P/E ratio is 10 (price/earnings). The P/E can then be compared with other companies in the same sector/industry in an effort to discover ‘undervalued’ or ‘overvalued’ stocks. If company A has a P/E ratio of 8 and company B has a P/E ratio of 12, then company A appears to offer better ‘value’.

There is however, a significant flaw with the P/E ratio. The ratio depends on the ‘price’ and the ‘earnings’ figure, both of which are not the best (truest) reflection of what a company is ‘worth’ (price) or whether it is genuinely ‘profitable’, in the strictest ‘operational’ sense. More sophisticated traders and analysts have learnt from history, not only in the way many companies (Enron springs to mind) engineer the ‘earnings’ by (mostly perfectly legal, but still questionable) manipulation of certain accounting tactics, whereby a true reflection of the operational efficiency (cash profits) of the business can be hidden from the ‘earnings’ figure alone, but also how companies are actually ‘valued’.

In this particular article, I will address the ‘value’ part of the equation. Many less sophisticated investors take the ‘market capitalization’ as a reflection of what a company is worth. And, this is where the paths between professional insider/institutional (smart-money) investor and the retail (independent) investor start to diverge.

The problem with the market capitalization value is that it is does not truly reflect the accurate ‘worth’ of a business. Imagine a potential buyer of a company who wants to know the true intrinsic value of the business he/she is about to acquire. The market capitalization is simply the stock price multiplied by the number of outstanding shares. At first instance, this appears theoretically valid. However, in business it is never as simple. An investor needs to also take into account any outstanding long and short term debts the company has (which the new buyer would have to take on), as well as any surplus cash it holds (which the new buyer would gain)…

Hence, to attain a true net ‘value’ of a business, the debt, minority interest and preferred shares are added to the market cap, then any cash is subtracted. This provides a more accurate, genuine indication of the company’s ‘real’ worth, as opposed to the very basic, flawed ‘market-cap’ figure. The resulting metric is known as the ‘enterprise-value’ (EV). Traders can view the EV for any business, via data providers such as Bloomberg, Thomson, and Yahoo Finance (simply enter any company symbol, then once the page loads, hit ‘key statistics’).

In my own trading,  I utilize the ‘enterprise-value’ metric, as part of my analysis to work out the free-cash-flow-yield. The free-cash-flow-yield is simply the free-cash-flow (a truer measure of earnings) divided by the enterprise-value (a truer measure of the market-cap). This key metric allows me to instantly identify potential trade ideas, taking into account superior, more accurate metrics than the very basic, questionable stock-price and earnings-per-share. The objective is to identify and shortlist fundamentally robust, undervalued stocks which exhibit a high free-cash-flow-yield, relative to competing businesses within the same industry.

Wishing you every success in your trading… and good spirit…

Shiraz Lakhi – Independent Investor/Entrepreneur

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