At Valuentum, we think companies that are attractive from a variety of different investment perspectives–whether it be growth, value, income, momentum, etc.–have the greatest probability of capital appreciation and relative outperformance. By definition, these stocks, which we call Valuentum stocks, have strong valuation and pricing support coupled with solid revenue/earnings expansion potential and, where applicable, strong dividend growth prospects. We accept the technical market dynamic that the more deep-pocketed institutional investors that are interested in a stock for reasons based on their respective investment mandates (or preferences), the more likely it will be bought and the more likely the price will move higher to converge to its true cash-flow-derived intrinsic value (the action of buying a stock pushes its price higher).
To capture a variety of different viewpoints in a single methodology, we apply a comprehensive analysis of a firm’s discounted cash-flow valuation via a three-stage model, a relative valuation analysis of the company versus its industry peers, and an assessment of the company’s technical and momentum indicators (which we use to gauge the timeliness of each idea). We think stocks that are cheap (undervalued) and just starting to go up (momentum) are some of the best ones to evaluate for addition to the portfolios. This process culminates in what we call our Valuentum Buying Index, which ranks stocks on a scale from 1 to 10, with 10 being the best. We generally add firms that register a 9 or 10 (a “we’d consider buying”) rating to the Best Ideas portfolio and consider the holdings in that portfolio our best ideas at any given time.
DirecTV (DTV) is one such Valuentum stock. On Monday, April 15, 2013, we released the April Edition of the Best Ideas Newsletter via email. In that newsletter edition, we included a transaction alert for DirecTV, where we added 55 shares at $55.02 per share, representing roughly a 2% position of the portfolio at the time. The company retains its position as a holding in the portfolio of the Best Ideas Newsletter, and it currently registers one of the highest ratings on the Valuentum Buying Index, a score of 9 (“we’d consider buying”) – it’s underpriced and is generating attractive buying interest. In the chart below, the point at which DirecTV was added to the Best Ideas portfolio (green ellipse) is shown, while the company’s current cash-flow-derived fair value estimate ($99 per share) anchors the upside of the technical projection range.
The Wall Street Journal reported May 1 that telecom giant AT&T (T) has approached DirecTV with an attractive offer to combine operations. This comes weeks after speculation that Dish Network (DISH) and DirecTV were getting close to tying the knot and shortly after news that Comcast (CMSCA) and Time Warner (TWC) will be merging, pending antitrust approval. Though it remains unclear whether DirecTV will choose to fold itself into AT&T’s operations or opt to join forces with Dish Network, the message is clear: DirecTV’s assets are in high demand and there are at least two suitors willing to make a bid. Based on our fair value estimate, we think DirecTV won’t be sold for anything less than $54.7 billion, the value of its operations on a standalone basis, as shown below (page 5 of its 16-page report).
If the company were to enter into a merger agreement with AT&T or another telecom giant, the potential synergies as a result of any transaction would drive DirecTV’s takeout value north of $99 per share, perhaps even well above its standalone estimated value (in our view). In the event deal talks fail, however, the company still has solid valuation and technical support, making DirecTV an asymmetrical risk-reward idea in this light, tilted in investors’ favor. In any case, DirecTV is one of our favorite positions in the Best Ideas portfolio, and shares advanced more than 4% Thursday to close at roughly $81 each.