Buy the Nasdaq-100 Index Removals - Part II

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This article is the second part of a series focused on the stocks being removed from the Nasdaq-100 Index. The first part highlighted the stocks being removed and the research behind the benefits of investing in these stocks. This one will focus on analyzing which stock might provide the best investment opportunity.

Valuation Metrics

One way to ascertain the stock that provides the best value at the current levels is to analyze the stocks using common valuation metrics. The below table includes some popular metrics

<table> <tbody> <tr> <td>Company  </td> <td>Market Cap (billions)  </td> <td> Price/Sales </td> <td> <p> Forward</p> <p>Price/Earnings  </p> </td> <td>  Net Cash  </td> </tr> <tr> <td><strong>Apollo Group <span class="ticker" data-id="202834">(NASDAQ: <a href="">APOL</a>)</span>  </strong></td> <td> $2.3</td> <td> 0.6</td> <td>  7.0</td> <td> $461M</td> </tr> <tr> <td><strong>Electronic Arts <span class="ticker" data-id="203416">(NASDAQ: <a href="">EA</a>)</span></strong></td> <td> $4.2</td> <td> 1.0</td> <td> 11.4</td> <td> $770M</td> </tr> <tr> <td><strong>Flextronics </strong></td> <td> $4.1</td> <td> 0.2</td> <td>  6.2</td> <td> ($540)M</td> </tr> <tr> <td><strong>Gree Mountain Coffee  <br /></strong></td> <td> $6.1</td> <td> 1.6</td> <td> 13.4</td> <td> ($480)M</td> </tr> <tr> <td><strong>Lam Research <span class="ticker" data-id="204354">(NASDAQ: <a href="">LRCX</a>)</span></strong></td> <td> $6.2</td> <td> 2.2</td> <td> 10.2</td> <td> $1.4B</td> </tr> <tr> <td><strong>Marvell Technology <span class="ticker" data-id="204570">(NASDAQ: <a href="">MRVL</a>)</span></strong></td> <td> $4.5</td> <td> 1.4</td> <td> 11.6</td> <td> $2.0B</td> </tr> <tr> <td><strong>Netflix </strong></td> <td> $5.1</td> <td> 1.5</td> <td>212.4</td> <td> $398M</td> </tr> <tr> <td><strong>Research In Motion </strong></td> <td> $5.6</td> <td> 0.5</td> <td> N/A</td> <td> $2.1B</td> </tr> <tr> <td><strong>Verisign</strong></td> <td> $5.9</td> <td> 6.9</td> <td> 17.5</td> <td> $810M</td> </tr> <tr> <td><strong>Warner Chilcott</strong></td> <td> $2.9</td> <td> 1.1</td> <td>  3.3</td> <td> ($3.7)B</td> </tr> </tbody> </table>

The above metrics provide a wide selection of valuations moving in different directions. Several stocks are showing strong signs of a potential rebound while others provide signs of further weakness.

Top Stocks

Reviewing the list, most of the stocks provide below market sales and earnings valuations. Hence, great examples of why these removed stocks tend to outperform the market. Though these companies have historically had great management teams and products, investors appear to be expecting the worst.

As mentioned in part I, these names are either broken stocks or broken companies. The key is to figure out which ones qualify in each category. The only two that appear to fall in the later category are Netflix and Research In Motion. Neither stock has an earnings profile that suggests the stock is at an attractive valuation.

The apparent broken stocks are the ones with an attractive valuation and a strong balance sheet. The following four appear the most attractive based on these general valuation metrics:

Apollo Group – the provider of online and on-campus educational programs and services has a strong balance sheet with over $450 million in net cash. The stock has been under extreme pressure with a 62% loss in the last 52-weeks. Analysts expect earnings to advance next year suggesting the forward earnings multiple of 7 might be cheap.

Electronic Arts – the developer and publisher of game software content and services for video games has suffered a 34% loss over the last 52-weeks. The conversion from console games to mobile and social gaming has hit revenues in the last few years. Analysts though expect the company to be back on track with solid growth in 2013.

Lam Research – the company is a leading supplier of wafer fabrication equipment and services to the worldwide semiconductor industry. Analysts expect 21% earnings growth while the stock only trades at 10x forward projections. Revenue is forecasted to jump by 14% next year suggesting a market rebound that investors aren’t buying yet. Not to mention, the $1.4 billion in net cash provides plenty of cushion for investors.

Marvel Technology – the fables semiconductor provider of high-performance application-specific standard products has seen the stock plunge 40% in the last year. The company only has an enterprise value of $2.5 billionB with over $2 billion in net cash. Analysts aren’t very sanguine about the future with earnings and revenue forecast to decline next year. The stock remains an extreme value if operations are turned around.


While these stocks appear to offer the most attractive valuations in the Nasdaq-100 removal group based on fundamentals, no guarantees can be made that a broken company such as Research In Motion won’t be the one to rebound next year. A long-term investor should consider buying a basket of the stocks to enjoy the rewards of investing in the over looked stocks.

Either way, investors should scour the list of stocks removed from the index instead of the popular ones added.


Mark Holder and Stone Fox Capital Advisors have no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Green Mountain Coffee Roasters and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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