Interested in finding undervalued technology stocks? If so, examining the Enterprise Value might be a great start.
For this list we searched for technology stocks with market caps over $300 million that appear undervalued to the levered free cash flow / enterprise value ratio. Furthermore, to emphasize their potential, we searched for the names experiencing significant levels of institutional buying in the current quarter.
Having trouble with these terms? Have no fear, we all start at the beginning. Let's take a look at these key terms and why they are valuable tools in analyzing a company's value.
Market capitalization, commonly referred to as market cap, is the total market value of a company's outstanding shares. It can be thought of as a measure of company's size. It can be calculated by multiplying the number of shares by the current price of the shares. A company's size can matter when examining risk. Stocks with large market caps are generally less volatile than those with small market caps.
Levered free cash flow is a calculation of the amount of cash that a company holds after it has paid taxes, repayments on its debts, and any expenditures to maintain or expand business (Capital Expenditure or CapEx). In other words, levered free cash flow is the money that the business can use to grow and pay dividends to shareholders.
Enterprise value is an alternative measure of a company's value (instead of using market cap). Theoretically, it is the cost of taking over a company, calculated as market cap plus debt and liabilities minus cash. For example, if Company A were to buy 100% of Company B, it would need to buy all the outstanding shares, the value of which is the market cap. Company A would then be stuck with any debts and liabilities that Company B had. But Company A would also get all of the cash that Company B had in the bank, which would help pay off the debts, etc.
Because cash is an important asset for a company (it allows them to buy new machines, hire more people, etc) and because it is hard to lie about how much cash a company has, a company that holds more cash is seen to be of better value.
The levered free cash flow to enterprise value ratio (LFCF/EV) is one method of measuring the value of a company. The more free cash a company has relative to its enterprise value (a high ratio), the cheaper the company appears.
Institutional investors are also known as "big money" investors or managers. They represent big pools of money such as investment banks, pension funds, mutual funds, hedge funds, endowment funds, etc. When they invest in stocks, they can invest hundreds of thousands of dollars or more at one time. These transactions, called "block trades," can have a significant effect on share prices.
Because institutional investors handle such large amounts of money, these investors spend a lot of time and energy researching companies to invest in.
Regular investors pay attention to what institutional investors do because it is easy enough to assume that the big money managers know what they are doing -- or at the very least know more than the average investor. This is why these investors are also sometimes referred to as "smart money." If institutional investors start investing in a company, regular investors can assume that some of the most talented analysts and money managers expect the company's share prices to increase over time.
Also, investors should never blindly trust analysts or institutional investors or anybody else. Use information on institutional investing with other research before making any investing decisions.
Do you think these companies are undervalued? Use the following information as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Blue Coat Systems
2. Kulicke & Soffa Industries
5. Photronics (PLAB): Semiconductor Industry. Market cap of $454.45M. Current price at $7.71. Net institutional shares purchased over the current quarter at 5.7M, equivalent to 11.09% of the 51.39M share float. LFCF at $58.17M vs. Enterprise Value at $433.68M, implies a LFC/EV ratio of 13.41%. This is a risky stock that is significantly more volatile than the overall market (beta = 3.15). The stock is a short squeeze candidate, with a short float at 12.98% (equivalent to 8.84 days of average volume). It's been a rough couple of days for the stock, losing 6.08% over the last week.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Becca Lipman does not own any of the shares mentioned above. Levered free cash flows and enterprise values sourced from Yahoo! Finance, rest of data sourced from Finviz.
The Motley Fool owns shares of Kulicke & Soffa Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.