Last year, private buyout groups raised a staggering $106 billion, the most ever and a 90% increase over 2004. This year stands a good chance of beating that record. And in 2005, investments in value stocks outperformed investments in growth stocks. I think value will beat out growth again in 2006. The explanation for the better returns from value stocks is pretty simple: So much money has been raised for hedge funds and buyout funds that corporate management at any underperforming company is really under the gun. Improve your company's performance, the activist investors demand, or we'll improve it for you. Add in a huge spike in merger-and-acquisition activity, and you have a value investor's dream: No more waiting for years until some catalyst finally forces the stock market to recognize the true worth of an undervalued company. Right now, that catalyst -- in the form of a buyout offer or a demand from a hedge fund -- is likely to arrive in a matter of months.
You don't think management was, how shall I put it, motivated to do everything it could during the holiday season to pull in every last dollar of sales? The Borders Group story isn't an isolated one. Last year, Toys "R" Us and Neiman Marcus were purchased by private buyout companies. Last week Burlington Coat Factory Warehouse ( BCF) auctioned itself off to Bain Capital for more than $2 billion. K Capital Partners, a hedge fund, wants management at OfficeMax ( OMX) to forget about its plans to turn the company around and, instead, put it up for sale. Not hard to see why: A recent report from Goldman Sachs estimates that OfficeMax would fetch $39 to $44 a share in a sale. Not bad for a stock now trading near $27.
The result of all that money jumping up and down on the managers of underperforming companies until they either performed or were bought out was that in 2005, value investing strategies outpaced growth. And the bigger a stock's market capitalization, the more value outperformed. At the small-cap end of the stock market, the Russell 2000 Value index outperformed the Russell 2000 Growth index for the year, 4.71% to 4.15%. At the large-cap end, the Russell 1000 Value index beat out the Russell 1000 Growth index, 7.05% to 5.26%. And at the very top of the market-cap pyramid, the Russell Top 200 Value index raced ahead of the Russell Top 200 Growth index, 4.6% to 2.88%. This year, the Russell 200 Value index was up 3.09% through Jan. 12, and the Russell 200 Growth index was up 2.76%. Value is outperforming growth even as the stock market stages a textbook January rally.
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) 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) and Sitel ( SWW).