I often refer to using a private equity mindset to achieve success as an investor. Private equity funds tend to do very well because they buy undervalued, unpopular stocks and hold them for a long period of time.
They tend to buy industries and sectors that conventional investors dislike and hold them until they become popular again. Most of them are pretty strict about what they will pay for a company, and most of the ones I have met over the years look for companies trading at an Enterprise value-to-EBITDA ratio of less than 5 and a reasonable multiple of total assets owned. That’s a pretty easy screen to run and turns up a few stocks worth consideration for long-term investors.
Mitchum Industries (MIND) is in the business of leasing seismic equipment to oil and gas companies. It also designs, manufactures and sells specialized seismic equipment for maritime oil exploration. The company has nine locations around the globe and has seen decent demand for oil and gas companies who wish to lease rather than own the complex expensive equipment. Mitchum has grown revenues and EBITDA by more than 16% since 2006 in spite of the global economic slowdown. MIND stock is cheap, trading at just 1.2 times book value and sporting an EV/EBITDA ratio of just 4.5. Management is actively buying back stock and has purchased more than 100,000 shares since April.
America’s Carmart (CRMT) is involved in a specialized segment of the auto market. The company sells older cars and provides the financing at more than 127 dealerships in the South Central area of the United States. The customers for this type of “buy here, pay here” auto sales are not likely to be going to the local Ford (F) dealer or Carmax (KMX) lot. Because of their poor credit and low budget they have limited choices, and America’s Carmart fills that void nicely. I have had several friends in the “sell and finance” business over the years, and this can be a wildly profitable business. CRMT has plenty of room to grow its footprint and opened three branches in the last quarter. CRMT stock currently trades with an EV/EBITDA ratio of just 4.5 and is priced at about 1.7 times book value.
Skywest (SKYW) is a regional airline in the United States that operates under code-sharing arrangements with Delta Connection, United Express, US Airways Express, American Eagle, and Alaska Air. The company has had some problems digesting the acquisition of ExpressJet back in 2010 but is still the largest regional carrier in the country. SKYW stock is very cheap at just 60% of book value, and the EV/EBITDA ratio is just 4.03. As the airline business continues to recover along with the economy, so should the prospects for SKYW stock.
Think like a private equity investor and buy cheap stocks based upon cash flow and assets. The key to success is to have the discipline to buy stocks when they are cheap and the patience to hold until the stocks come roaring back into favor in a few years.
As of this writing, Tim Melvin was long SKYW.