Buying Cheap

Posted on April 17, 2013 by David Laidlaw

Our investment philosophy focuses on buying high quality companies at reasonable prices. Since the market rebound which began four years ago, the valuations for many stocks have increased dramatically. In general, higher stock prices relative to their earnings and cash flows translate to lower future returns since investors will not pay more and more for earnings.

Therefore, we have been focusing our research and recent purchases on companies with lower valuations. This strategy sacrifices some quality for lower prices, but we believe this course of action is prudent as the market continues to rise.

For example, we recently purchased Amdocs in our portfolios (symbol: DOX). Amdocs creates billing and customer relationship software for telecommunications companies such as AT&T. The company trades for about 12 times what it will earn this year. Amdocs also has a very strong balance sheet with close to a billion dollars in cash, which is equivalent to $6 per share against its share price of $36.

We also bought an obscenely cheap semiconductor company, Kulicke and Soffa Industries (symbol: KLIC), in our small cap accounts. KLIC manufactures machines that connect semiconductor chips to each other or circuit boards. Its business is not growing dynamically, however, KLIC has a very large cash balance relative to its market capitalization. KLIC has almost $500 million in cash compared to a market capitalization of only of $868 million. Therefore, the company’s ongoing business is only being valued at about $368 million, even though the company earned $155 million over the past year.

We expect companies such as Amdocs and KLIC will fall less than more expensive companies if the market corrects. Our portfolios are still tilted toward companies that should grow; however, in markets such as these, it often makes sense to balance that growth with “cheaper” stocks.