Price is what you pay, and value is what you get. Throughout market turmoil, we often observe that the value/price ratio improves considerably for long-term investors with patience. Meanwhile, investors have to separate the facts from the noise.
Be greedy (or at least, less fearful) when others are fearful - this easy-to-understand doctrine may be hard to implement for many. We at Urbem believe that a couple of metrics are particularly helpful in offering affirmative clues to identify wonderful businesses that can not only survive the crisis but can also thrive and deliver shareholder value. We like to call them the “relax” signs during a panic moment.
Insider buys
When the management buys stocks in a panic sell-off, shareholders may want to relax a bit. Take a look at Nemetschek (XTER:NEM, Financial), the German expert in software for architects, engineers and the construction industry. The company maintained a consistently high return on capital while more than tripling its annual free cash flow over the last decade (see below).
According to the company’s filing, CEO Axel Kaufmann has bought the company’s shares twice so far in March, spending a total amount of nearly a million Euros across several transactions, as the stock price has been almost cut in half. Although we are not judging the fair value of the stock and the timing of insider activities, the news can be particularly interesting to potential shareholders of Nemetschek, as the share price has already dropped moderately below the lowest price that the CEO was paying.
As indicated below, incoming shareholders have tended to shy away during the last couple of years thanks to the valuation, which has been as high as over 60 times the price-to-free-cash-flow ratio.
For the latest quarter, the debt-to-equity ratio at Nemetschek was 0.54. The business generates an over 20% free cash flow margin and expends CapEx of less than 4% of sales in a typical year.
On the contrary, when insiders sell, investors may want to stay cautious in terms of how much value is left on the table . For example, the shares of Zoom Video Communications (ZM, Financial) skyrocketed over the past month while the management team (from C-levels to directors) have been busy selling.
Expansion in share repurchase
As with the management team, we consider the company itself a significant insider. Usually, an increase in share buybacks indicates a robust financial position, an attractive share price and management’s confidence regarding near-term prospects (the only common exception being when repurchases are needed to make up for stock-based executive compensation plans).
This is especially true during a tough time like these days. We notice that vulnerable major banks have recently suspended their share repurchase programs, while economically sound businesses may be busy buying back more shares at lower prices than before.
For instance, MAXIMUS (MMS, Financial), a leading provider of government services worldwide, lifted the limit of its buyback program $200 million from less than $40 million. As described below, the business dramatically increased its free cash flow while always maintaining its returns on capital at above 20% for the last decade. The stock price went down by nearly one third this year. In the meantime, the company has almost no debt and plenty of liquidity on the balance sheet.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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