In the world of investing, it's not uncommon to come across stocks that are overlooked or undervalued by the market. Today, I want to share my insights on one such stock that I believe holds significant potential - Spectrum Brands.
My journey began with a stock screener, Seeking Alpha, to identify potential investment opportunities. I was looking for companies with market capitalizations of less than $5 billion, a high percentage of shares outstanding shorted, and positive free cash flow. Spectrum Brands emerged at the top of the list, seemingly overvalued according to the screener. However, I believe that the screener's valuation is incorrect due to its reliance on outdated quarterly earnings data.
Spectrum Brands recently sold one of its largest business units for $4.3 billion, a fact not yet reflected in its balance sheet on the screener. This sale significantly alters the company's financial position, adding a net cash of $3.6 billion to its balance sheet. This means the company now has more cash than debt, a strong position that isn't reflected in the stock screener's valuation.
The company's management, led by a CEO who identifies as a hybrid value investor, has a track record of acquiring companies, building them up, and selling them for profit. I have confidence in their ability to continue this successful strategy.
Spectrum Brands is planning to use $1.6 billion of its new cash to repay debt, leaving $2 billion for other uses. They could use this to buy back shares, reinvest in the company, or potentially sell another business segment for additional cash.
The company's current plan is to buy back $1 billion worth of shares, which is about one-third of the company. With a high percentage of shares shorted and a low float due to significant insider ownership, there's potential for a short squeeze. While I'm not betting on a short squeeze, it's an interesting possibility to consider.
In conclusion, I believe Spectrum Brands is significantly undervalued. The company's strong balance sheet, successful management strategy, and potential for growth make it an attractive investment. I'm excited to add this stock to my portfolio and look forward to seeing how it performs in the future. Stay tuned for more updates on my investment journey!