While scrolling through a list of U.S. stocks this morning I saw something quite strange – a technology stock – indeed a stock in the enterprise security space (this is cool right now and investors are paying silly money) trading at a significant discount to fair value. It’s at this point that the story gets really strange. I’m referring to Symantec Corp. (SYMC.O).
You see, president and CEO Stephen Bennett hadn’t delivered on various products and the board were unhappy at the pace of new product development. Instead of the normal institutional love-in that passes for accountability in global capital markets, the board actually fired the CEO.
I had to pause to try and remember when that last happened to a large-cap firm, but nothing comes to mind. To remind viewers – the playback is for the board to do an impression of a bunch of octogenarian golfing buddies, no matter the level of company performance. Even regulators only occasionally show their teeth through hinting at the need for a new CEO (think Bob Diamond, ousted from Barclays in 2012 after regulators said they had lost confidence in his leadership).
To be sure, Symantec has some challenges as its core security franchise hasn’t adapted well to the challenge of mobile computing – but with the aggregated U.S. IT sector trading at exactly fair value (P/IV of 1.0) anything trading at less than 0.6 looks very intriguing. Remember, the way to beat the market is to identify mispriced securities, not just securities that are doing well. The first screenshot shows the list of some of the unloved names in the U.S. tech space.
Facing the cannons
Lord Nathan Rothschild, an early contrarian, was reputed to have said “buy to the sound of cannons, sell to the sound of trumpets.” There are dozens of updated versions but the sentiment remains the same – it’s when others are snorting at the challenges facing a company that buying opportunities emerge, not when there’s cheerleading occurring throughout the retail and institutional community.
I understand that the market sells off whenever a stock exhibits unexpected behaviour – but do I want to invest in a firm where the board is actually paying attention to the CEO’s deliverables, measuring performance and examining product strategy? Hell, yes.
CEO’s track record
Looking at the above chart, it hardly appears the board has been impatient – Symantec went sideways/down since Bennett’s appointment, hardly speaking to market comfort with strategy. Indeed, not too many tech stocks are up only 30% over 5 years; the aggregated return of the U.S. IT sector is 31% over just 12 months.
Worth some patience?
At 9.89 times forward earnings you can see Symantec is hitting rock bottom – now down into single digits whereas the software industry is at almost 23.5 times earnings. Clearly, this is a longer term story requiring patience as a new CEO arrives – but chances are the easiest money will be made before a new CEO is anointed and while the sell side sits on the fence (10 buys, 15 holds, 4 sells).
In a market frothy with cheap credit and a fin de siècle feeling before the Fed takes away the punch bowl, I’d be carefully evaluating stocks that haven’t already priced in success. Symantec seems to tick that box – low valuation on an earnings basis and also a market-implied 10 year CAGR of 1.2%, neglect and a number of recent downgrades from the sell side as they wait for the CEO announcement. If out of favor tech stocks are your thing – this could be worth some consideration.
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