Diary of a Financier

Quant screen: Core Value & Low EV (February 2014)

In Trading Desk on Tue 18 Feb 2014 at 17:01

My quantitative screens scored the following names as the highest ranking outputs for February…

Low Enterprise Value (2/10):

  1. HCI Group Inc ($HCI)- bought 10/18/13
  2. Banco Macro SA ($BMA)- bought 10/18/13
  3. Myriad Genetics ($MYGN)- new
  4. Argan Inc ($AGX)- watch
  5. Magellan Health Services ($MGLN)
  6. Qlogic ($QLGC)- watch, new
  7. Raymond James Financial ($RJF)- watch
  8. Marvell Technology ($MRVL)- watch, new
  9. Advanced Energy Industries ($AEIS)- watch, new
  10. Kimball International ($KBALB)- watch, new
  11. FXCM Inc ($FXCM)- bought 6/21/13
  12. AVX Corp ($AVX)- watch, new

Low EV 2014.02.10

Core Value (2/13):

  1. Sanderson Farms ($SAFM)- watch, new
  2. Magna International ($MGA)
  3. Magellan Health Services ($MGLN)
  4. Foot Locker ($FL)- bought 4/30/13
  5. Lear Corp ($LEA)
  6. Tyson Foods ($TSN)- watch, new
  7. Standard Motor Products ($SMP)- previously

Core Value 2014.02.13

~~~~

Marvell Technology ($MRVL)

We opened a half position in MRVL, starting small since they’re reporting Q4 & FY13 earnings on 2/20 (after hours).

MRVL supplies chips for popular electronics devices like XBox One ($MSFT), Playstation 4 ($SNE), and Western Digital ($WDC) computers & notebooks.  Most people think $QCOM is the industry leader in China, but MRVL is actually the preferred chip supplier for Chinese 4G mobile phones.

In fact, upon ramping-up production in 4q13, MRVL met massive demand for China’s 4G mobile phone components. They were so overwhelmed with orders that they were undersupplied and still working-off the the excess demand.MRVL chart & fundamentals 2014.02.20

Given its inclusion on my Low EV screen, MRVL is clearly deep value from a fundamental standpoint.  Their strong balance sheet and cash position (26% net cash/share) have helped them repurchase ~15% of outstanding shares since 2012, dedicating almost 100% of free cash flow to shareholders.  Further, insiders own 22%, and David Einhorn’s Greenlight Capital owns >9%.

Marvell is currently grappling with a Carnegie Mellon patent infringement litigation.  In CMU’s local Pittsburgh court, a jury ruled against MRVL with a recommendation of $1.17B in damages.  MRVL’s appeal was recently rejected, so it’s awaiting the judge’s final verdict.  Worst case, his ruling will call for $3.5B in damages–3x the jury’s recommendation if the judge considers this “willful infringement.”  Base case is for the aforementioned $1.17B. In either case MRVL will have to reserve cash for litigation expenses once the penalty is handed-down, then appeal the case to a more favorable jurisdiction.  MRVL itself expects to garner a more favorable ruling in a higher court, since Pittsburgh’s court is biased toward local CMU. So, these proceedings will likely last through 2014.

A $1.17B settlement means a 5% hit to FY14 EPS (-6c), which base case is priced-in to the stock. Some Street analysts actually think MRVL will gap-up on a resolution, which would remove the distraction of this legal process.

MRVL has plenty of cash ($1.8B mrq) to reserve for this litigation expense, but they also have $1B surety bond arranged plus assets to secure a debt offering.  Management has indicated that it would prefer to finance the litigation expenses than idle the company’s cash, which says a lot:  first, it means their cost of capital is low enough that there’s an opportunity cost to not investing in the business; second, management has said it would rather maintain its share buyback program or (at worst) increase its dividend.

~~~~

Here’s the performance to date (total return) of unrealized positions still open from prior screens; buys executed throughout the year, as specified in my trade reconciliations:

$ARII +49.79%
$BMA -1.90
$FL +12.41
$FXCM +2.33
$HCI +6.95
$JOSB +24.97
$NDZ +12.42
$VMI +10.57

Here are the total returns of positions closed recently:

$GCO +19.04%
$IBKR +39.97
$SMP +10.80

Here’s a followup on the last Core Value screen 12/20:

Passive +5.47% (alpha= +3.99)
Active +4.80% (alpha= +3.33)
SPX +1.48%

Core Value 2013.12.20_update

Here’s a followup on the last Low Enterprise Value screen 11/11–my first ever losing output:

Active & Passive -0.39% (alpha= -4.31)
SPX +3.92%

Low EV 2013.11.11_update

–Romeo

Advertisements
  1. $MRVL 4q13 earnings:
    – 4q13 EPS (29c v 25) & Rev (931mm v 901) beat big
    – Q1 guidance exceeds consensus (Rev 890mm v 837)
    – shs -3% at open

    Q4 report: http://seekingalpha.com/news/1582193-marvell-technology-group-ltd-beats-by-0_04-beats-on-revenue

    Q1 & FY14 guidance: http://seekingalpha.com/news/1583153-tech-earnings-guidance-aruba-marvell-maxwell-qlik

Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s