Best Ideas Newsletter portfolio holding Ancestry.com (click ticker for report: ) is rumored to have rejected initial buyout offers from private equity firms, citing a rosy future that should warrant a higher premium. According to the source in the Bloomberg article, Ancestry.com rejected an offer of $35 per share, which is significantly lower than our fair value estimate of $45. We still like the company based on fundamentals and valuation and expect higher offers from interested parties.
That said, we do not think buying any company’s shares exclusively in anticipation of a buyout offer makes sense. Deals are rumored to happen all the time, so the ratio of rumored deals to actual deals is quite high. When we established our position in shoe retailer Collective Brands (PSS), for example, the odds of a buyout were a potential catalyst, but we thought shares had valuation upside–so we weren’t reliant on a deal getting done. Subsequently, shares rallied throughout early 2012 and we earned a 38% return on our initial investment. Investing in a company only based on a buyout rumor is partially why we aren’t interested in Best Buy (click ticker for report: ). Sure, a deal for Best Buy could get done tomorrow for $25 per share, but if a deal is taken off the table, the stock could easily fall from $18 to $12.
Though Ancestry.com’s shares have rallied lately, we still think the company has fundamental valuation upside from current levels. Further, shares score a 7 on our Valuentum Buying Index (our stock-selection methodology), suggesting we’re still fairly constructive on the company’s near-term prospects. Therefore, a buyout may be a catalyst, but we’re comfortable owning the company even if a deal doesn’t materialize.
Disclosures: Brian Nelson has long exposure to ACOM at the time of this writing.
Disclosures regarding 16-page report (January 2012): https://seekingalpha.com/article/317432-why-ancestry-com-is-undervalued