Cash In on the Great Buyout Boom

But what makes this a value stock rather than a cheap growth stock is the balance sheet and the value of the company's Internet auction system. At the end of the October 2005 quarter, Copart had $255 million in cash and other short-term investments on its balance sheet (and no long or short-term debt). Not too shabby for a company with a market capitalization of just $2.2 billion.

The company is working to secure patents on its new Internet auction platform, VB2, which employs a technology that could be applied to other markets, according to Wall Street analysts. The market has been reluctant to put a value on Copart's VB2 platform, however, because the company has been sued for patent infringement by a competitor.

Looking for a catalyst? It's reassuring to see Jana Partners in the list of Copart's institutional owners. Jana Partners owned 3.1 million shares as of Sept. 30 and had bought 370,000 shares since the end of the previous reporting period, our ownership tool shows. Jana Partners is one of the private equity groups that has piggybacked on Carl Icahn's attempt to force Time Warner(TWX Quote) to unlock the value of its stock by selling or spinning off its America Online unit. And the company was involved last year in the nasty proxy fights at Six Flags(PKS Quote) and Sitel(SWW Quote).

Tilting the Playing Field

Remember what the buyout groups themselves look for in an investment:

Cash: They like to see cash on the balance sheet. In these deals, a company's own cash is often used to cover part of the purchase price.

Low debt, physical assets: They like to see low levels of debt and solid physical assets, such as property that can be used to back the debt financing that might be used to raise part of the purchase price.

Cash flow: And, finally, a buyout group will want to see healthy cash flow that can be used to pay off debt or to reward the buyout group with special dividends: This has been a growing trend in the last year or two.

There's no guarantee that a stock that meets these criteria will have attracted a buyout group, or that either current management or the buyout group will succeed in realizing the value that you think lies buried in the stock.

But by aligning yourself with the buyout boom, you've put one more financial market trend to work for you. That always helps. There's no point to investing on a level playing field, after all, unless you absolutely have to.