A New Raw Greed Watchlist

Posted on October 31, 2006 , filed under Stocks | Print This Post

I’ve decided to construct a watchlist of companies and their stocks, whose prices I believe have been pushed down too agressively from speculation on short-term business prospects or heavy shorting. The stocks on this list are also those whom I believe have a high chance of recovery. I will cover one company at a time and will post a detailed analysis with price targets if I purchase any shares in the company.

1) Valassis Communications, Inc. (VCI) provides various marketing products and services to manufacturers, direct marketers, retailers, franchisees, and other advertisers. I first came across Valassis from this Motley Fool article and I’ve had VCI on my watchlist ever since. Valassis is being pressured though a law suit to honor an aquisition of ADVO, Inc. (AD). Valassis is currently arguing that ADVO has misrepresented the value of their company and Valassis is currently attempting to nullify the transaction. It’s unlikely that there will be any clear direction from the law suit in the short-term. I believe this will put a tremendous amount of speculation and downward price pressure on the stock. I like VCI at under $11 and believe that would put a decent long-term risk discount on the ADVO acquisition going through.

Taken from the Motley Fool article:

…Valassis operates in a duopoly, and the business has extremely high returns on capital and throws off extremely healthy free cash flows. In fiscal 2005, sales increased 8%, and the company earned $158 million in operating income and $95 million in net income. The balance sheet is also healthy, with $100 million in net debt. Although the first half of 2006 has been pressured by aggressive pricing by News America, Valassis’ $850 million market cap and 11 price-to-earnings ratio are both extremely low for a company of this quality. Investors can expect anywhere from an 8%-11% free cash flow yield from investing in Valassis, with the possibility of further growth.

Of course, as with all cheap stocks, there’s a catch. Valassis recently agreed to buy Advo (NYSE: AD - News), a direct marketer, at a hefty premium. After agreeing to the deal, Valassis moved to terminate the agreement based on allegations that Advo used faulty accounting. If the courts decide in Valassis’ favor, then the company’s stock should see a nice bump upward. If not, then Valassis will be forced to pay an expensive price for a company it doesn’t want, which would erode shareholder value.

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