By John Spence
Crabtree Technology portfolio manager Barry Randall on Monday was rewarded for his decision to stick with holding LSI Corp. (LSI) after the stock rallied nearly 40% on news the storage and networking firm plans to be acquired by Avago Technologies (AVGO).
The $6.6 billion all-cash acquisition in the semiconductor sector was announced before the market opened Monday, and values LSI at $11.15 a share.
"Investors like the deal," Randall said. "It makes sense for Avago, which is strong in its main wireless business. It has some exposure to storage but not much, which is where LSI comes in. So Avago diversifies away from dependence on one sector. The deal is immediately accretive to Avago, and both stocks are up today, which you don't really see often."
Avago shares climbed about 9% in afternoon trading Monday.
Randall expects the acquisition to be approved by shareholders at both companies.
"The deal is easy for everyone to swallow," the portfolio manager said. "The acquisition values LSI at about 15 times forward earnings, which is above the 12 times average but is not a stratospheric valuation by any means. Avago gets a nice division, and LSI shareholders get a nice premium. LSI may have shopped itself around when it got wind of Avago's interest, but both boards have agreed to the deal, so it doesn't look hostile in any way. Everyone is happy."
Randall first started buying LSI shares in May 2012 at just under $7 and has held the stock in Crabtree Technology portfolio since them. The company started showing up in his quantitative screens as early as 2011 because LSI generated solid cash flow and was increasing market share.
"LSI hits its quarterly numbers and rarely disappoints," Randall said.
However, he added the stock hasn't been a standout performer in his portfolio the past year. LSI shares were up about 16% for the trailing 12 months before Monday's big rally on the Avago acquisition news. Crabtree Technology portfolio is up nearly 44% over the past year after fees.
LSI shares underperformed the rest of Randall's model the last year, but sticking with the stock has paid off.
"Companies in the portfolio being acquired doesn't happen every day, but it is nice when it happens," Randall said Monday, adding he will likely sell LSI prior to the deal's expected closure, as is his habit.
The Crabtree Technology portfolio also currently owns LSI's primary competitor in semiconductors for storage applications, Marvell Technology (MRVL).
Photo Credit: Fr3d.org
DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
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