Hedge Funds Are Selling 2 Foreign Tech Stocks That May Be Undervalued
May 21 2013, 03:28 | about: GILT, TLK
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Below is a list of two technology companies, based in Israel and Indonesia, currently being sold by hedge funds. They appear undervalued based on levered free cash flow/enterprise value ratios, but vary widely across other metrics.
To create the list we began with a screen of the foreign technology sector for stocks with bearish sentiment from institutional investors, with significant net institutional sales over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these companies to underperform in the future.
We then screened for companies that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value. Levered free cash flow can be used to pay dividends, pay for expansion or finance growth opportunities by taking on debt.
Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued.
We were left with a list of two companies, detailed below with more financial data, particularly measures of valuation.
The List
For an interactive version of this chart, click on the image below. One year returns sourced from Zacks Investment Research.
Do you think these stocks deserve to be sold off by institutional investors? Use the list below as a starting point for your own analysis.
1. Gilat Satellite Networks Ltd. (GILT): Provides Internet Protocol (IP) based digital satellite communication and networking products and services worldwide.
Market cap at $220.59M, most recent closing price at $5.31
P/E: N/A; global industry average: 34.92
Forward P/E: 27.84; global industry average: 27.26
PEG: N/A; global industry average: 3.08
Price-to-book ratio: 0.92; global industry average: 2.39
Price-to-free cash flow ratio: 13.10; global industry average: 55.00
Debt/Equity: 0.22, global industry average: 0.35
Net institutional sales in the current quarter at -1.8M shares, which represents about 8.47% of the company's float of 21.25M shares.
Levered free cash flow at $39.15M vs. enterprise value at $198.72M (implies a LFCF/EV ratio at 19.7%).
GILT has returned -7.45% since 4/15/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like ViaSat Inc. (VSAT) and ShoreTel, Inc. (SHOR), which returned 28.19% and 26.69% during the same time period.
The company's earnings growth looks weak, with EPS growing by -291.84% over the last year. This is considerably weaker than competitors like EchoStar Corp. (EPS growth over the last year at 5642.92%) and Comtech Telecommunications Corp. (EPS growth over the last year at -36.02%).
GILT has a low short float compared to industry averages, suggesting perhaps that short sellers see limited downside in the stock. The company's short float stands at 0.04%, much lower than ViaSat Inc. (short float at 8.97%, representing 18.26 days of trading volume) and Comtech Telecommunications Corp. (short float at 4.10%, representing 5.32 days of trading volume).
GILT released its most recent earnings report on 5/8/2013, and as The Motley Fool reports, reported revenue of $82.8 million which fell slightly below analyst expectations. Net margins and operating margins grew, as did revenue over the same quarter in the previous year. However, gross margin shrank by 90 basis points compared to the prior-year quarter. Motley Fool CAPS gives GILT a five out of five star rating, and 23 of 23 CAPS All-Star picks give the stock a green thumbs-up.
