Rejoice! Corrections bring Opportunity

Rejoice! We appear to be having a correction.

I have absolutely no idea where the market may go over the next few days, weeks, or months. I know that if I pay too much for a stock, no matter what the market does, I inevitably receive another lesson in value discipline. Overpaying for a business is always folly. Similarly, regardless of the market’s movement, when I buy stocks with a margin of safety, the performance of the portfolio moves ahead. Buying a business for less than its intrinsic value always makes sense.

Last week’s undoing of the YTD rally in stocks will no doubt cause many investors to pause in their tracks, and to perhaps re-think their strategy for the year. I expect to see somewhat more somber outlooks from Wall Street strategists in the coming weeks if the weakness persists.

Wasn’t it just a week ago that the greatest parlor game in town was guessing how high the price targets on GOOG might get? The highest target price is $600 and the highest estimate of growth for 5 years is 70%. The highest target price estimate belongs to Piper Jaffray and was issued on Thursday, Jan 19th. His (or her) estimate for long term growth was 35%, only slightly higher than the 34% consensus. The highest estimate for growth for GOOG belongs to ThinkEquity at 70%, which apparently was a downgrade in the estimated growth rate from prior “thinking.” Glad to see that some conservatism has come back to the fore!

I did a screen of companies that have gone down 10% or more YTD but are trading at free cash flow multiples below their respective industry or had superior returns on capital relative to their industry. Please note that I need to do considerably more work on them and their accounting. If you have any ideas or thoughts, please comment. Here’s a few of the names that I found at least superficially interesting:

Almost Family (AFAM)
Down 11.88% ytd
EV/EBIT (TTM) 6.59X
CFFO consistently greater than net income
Free cash flow generated in 3 of last 5 years
ROIC around 7.5%

Children’s Place (PLCE)
Down 15.07% ytd
EV/EBIT (TTM) 16.39X
CFFO consistently greater than net income
Free cash flow generated in 3 of last 5 years
ROIC 24% in most recent quarter, well above more normalized 11%

InfoSpace (INSP)
Down 10.81% ytd
EV/EBIT (TTM) 6.51X
CFFO consistently greater than net income
Free cash flow generated in 3 of last 5 years
ROIC around 7.0% substantially below recent history of 20% plus.
Can the wireless business offset the weakness in search?

Kendle International (KNDL)
Down 16.86% ytd
EV/EBIT (TTM) 16.7X
CFFO consistently greater than net income
Free cash flow generated in 5 of last 5 years
ROIC around 12.0% most recent quarter, above the TTM of 8.1%
Have the rule changes destroyed the economics?

Kronos (KRON)
Down 11.28% ytd
EV/EBIT (TTM) 13.53X
CFFO consistently greater than net income
Free cash flow generated in 5of last 5 years
ROIC 22% versus TTM of 16.4%

Lifecore Biomedical (LCBM)
Down 19.17% ytd
EV/EBIT (TTM) 20.0X
CFFO consistently greater than net income
Free cash flow generated in 4 of last 5 years
ROIC around 26% in last 12 months versus recent 6%.

LSI Industries (LYTS)
Down 15.58% ytd
EV/EBIT (TTM) 10.95X
CFFO consistently greater than net income
Free cash flow generated in 5 of last 5 years
ROIC around 10.4% consistent with TTM

Modine Manufacturing (MOD)
Down 20.37% ytd
EV/EBIT (TTM) 10.26X
CFFO consistently greater than net income
Free cash flow generated in 5 of last 5 years
ROIC around 7% versus 7.8% TTM.
National Beverage (FIZ)
Down 16.07% ytd
EV/EBIT (TTM) 8.06X
CFFO consistently greater than net income
Free cash flow generated in 5 of last 5 years
ROIC of 10.2% recently versus 10.7% TTM

Syneron Medical (ELOS)
Down 17.86% ytd
EV/EBIT (TTM) 15.85X
CFFO generally but not consistently greater than net income
Free cash flow generated in 4of last 5 years
ROIC of 48% compared to TTM of 34%

When screening for below market price performance, I often come across below market companies. For various and sundry fundamental rationale, and some superficial familiarity, I bring these companies to your attention. As always, not a recommendation to buy, sell, or do anything, these are merely what I believe to be interesting names that merit further attention. I have yet to complete a DCF on any of these names but intend to work on these shortly.

Consequently, at this point, neither I nor my clients own a position in any of these companies.