Here’s a great interview with John Rogers of Ariel Investments speaking with Business Insider. During the interview Rogers shares some great insights into how ‘Cheap Orphan’ stocks appear in high volatility environments, saying:
We try to make volatility our friend. And when we see stocks that are gapping down on maybe where there’s no fundamental change in the long-term economic outlook of that business. Well that creates an opportunity. I think that’s an important thing. So volatility should be something that helps you. On the other hand when stocks spike higher and maybe get overpriced that can be an opportunity for us to trim. Take some profits and move into cheaper companies.
So volatility doesn’t scare us and we think that in this environment where everyone’s been in this flight to safety, More and more investment communities have gotten more and more conservative, so they’re moving money to the safe parts of the marketplace. That means the stocks that are left out can be truly orphaned and be really cheap. So we’re trying to find those ‘cheap orphans’ in this type of environment.
(Source: YouTube)
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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.
It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization.
The Acquirer’s Multiple® is calculated as follows:
Enterprise Value / Operating Earnings*
It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com.
The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT.
Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up.
Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC.
He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.
Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener.
All metrics use trailing twelve month or most recent quarter data.
* The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
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