On January 22, we distributed a B.I.G. Tips report to our paid subscribers called, “WWPED (What Would Private Equity Do?” In that report, we looked through the carnage in equity markets to find beaten down, value names that could be attractive targets to the private equity world. We noted that while private equity firms can have widely divergent strategies, they often look for some key characteristics: under-performing companies and significant free cash flow potential. Using that as a guide, we sorted through the Russell 1,000 for companies that were then trading at 10x or less on a “TEV / (EBITDA – Capex)” basis, which is a good proxy for valuation relative to cash flow. We found 39 names that met our criteria and highlighted three in particular (URBN, GNC and GMRE) in that report. It’s no secret that value names have outperformed during the rebound and that beaten down names have outperformed even more so. Even recognizing that, our list of 39 possible targets highlighted in that report has outperformed the broader market handily since then. The “WWPED stocks” are up on average 12.6% since our report, with a median return of 10.0%, while the S&P 500 is up 3.7% over the same time frame.
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