Present-day, Joel Greenblatt manages the $7.13 billion Gotham Asset Management fund- a fund he guided to step into Equifax Inc. (NYSE:EFX), ante up in Oracle Corporation (NYSE:ORCL), and backpedal in iRobot Corporation (NASDAQ:IRBT) during the second quarter.
Greenblatt gained notoriety with his book that first spilled the “Magic Formula” secrets for how to select the choicest stocks, called The Little Book That Beats the Market. By calculating which 30 stocks leading the market bring the best earnings yield coupled with lofty capital returns while shorting the priciest, least profitable or valuable Wall Street players, this hedge fund guru and keeper of The Big Secret for the Small Investor managed to outclass the S&P 500 an impressive 96% of the time. Not only did Greenblatt take on the S&P 500 and win, he amassed a nice average 17-year winning yearly return of 31%.
Let’s put Greenblatt’s Magic Formula to the test here. How did his careful quarterly moves pay off?
An Inopportune Dig into Equifax
Joel Greenblatt is now surely biting the bullet after having chosen the wrong time to invest in Equifax, with Gotham initiating a holding of 32,482 shares worth $4,464,000. Though the hedge fund guru initiated in Equifax in a second quarter play, this week, the stock has suffered a sharp plummet after hackers grabbed hold of confidential data from almost 143 million U.S. web users.
Rewind to just two months ago, one of the leading big consumer-credit reporting companies in the U.S. already had a weakness in a Web application: the Apache Struts framework. Allegedly, this bug had been resolved as of March 6th; but just three days after, the company already fell to a hacker attack, with these online criminals attempting to exploit an opening to plant fraudulent applications on servers. By the middle of May, the breach fell sway, says the company.
The credit report provider went six weeks without a word before revealing the company had a problem on its hands. Considering that three of Equifax’s executives coincidentally sold $2 million, or £1.5m off from their stakes during that period, it is no wonder that when Tuesday rolled around, 36 senators in the U.S. were out charging for a federal investigation. With a slew of legal claims being thrown at Equifax and apprehension at a record high with 143 million social security numbers, among other sensitive details, at the mercy of the hackers.
Taking under account that this trust-shaking breach could even transpire is a reflection that the credit report provider did not properly update its Web applications, with identity thieves having no trouble at all cracking into discreet sites online.
J.P. Morgan analyst Andrew Steinerman has not lost out hope yet on the strength of Equifax’s long-term opportunity, but in understanding the near-term has been shot amid this public breach scandal, the analyst reiterates an Outperform rating on the stock while slicing the price target from $167 to $135, which represents a 41% increase from where the stock is currently trading. (To watch Steinerman’s track record, click here)
“The credit bureaus have maintained an orderly relationship with regulators, but the EFX breach presents the risk that oversight could now intensify. Congress has since requested hearings, and some members have sent requests for information from Equifax including […] recent executive stock sales. While it is too early to tell what might transpire, we could foresee new standards of cybersecurity set, possible fines, and a potential mandate that the provision of free TrustedID be extended past twelve months. We also recognize that the breach could open up new or lingering areas of concern around the rate of consumer dispute resolution as well as marketing practices of D2C paid products. We believe that Equifax will respond by highlighting the public good that consumer credit reports serve in facilitating fair lending practices and the low cost to lenders these reports reflect,” highlights Steinerman.
Yet, despite a stock who has collapsed a third lower in value in a matter of two days, the analyst maintains a bullish perspective on the bigger picture: “Regardless of the near term impact Equifax sees from this breach, our conviction in the company’s long-term outlook remains strong.”
Officials wrote an update online on behalf of the credit report provider, noting, “Equifax has been intensely investigating the scope of the intrusion with the assistance of a leading, independent cybersecurity firm to determine what information was accessed and who has been impacted […] We know that criminals exploited a US website application vulnerability. The vulnerability was Apache Struts CVE-2017-5638. We continue to work with law enforcement as part of our criminal investigation, and have shared indicators of compromise with law enforcement,”
Most of Wall Street is suffering from these falling shares right along with Greenblatt this week, considering TipRanks analytics exhibit EFX as a Strong Buy. Out of 8 analysts polled by TipRanks in the last 3 months, 7 are bullish on Equifax stock while 1 remains sidelined. With a return potential of 44%, the stock’s consensus target price stands at $140.88.
Oracle Gets a Raise
Oracle is a viable tech option from where Greenblatt is standing, as the guru saw fit to hike his fund’s position in the company by a whopping 454% to 488,994 shares worth $24,518,000.
Rosenblatt analyst Marshall Senk is betting on Oracle ahead of its first fiscal quarter earnings for 2018 due this evening, among many voices on Wall Street, some who have upgraded expectations on the software giant particularly on the heels of the strength of the fourth fiscal quarter print from 2017.
In a bullish quarterly preview, the analyst reiterates a Buy rating on shares of ORCL with a $58 price target, which implies a close to 10% upside from current levels. (To watch Senk’s track record, click here)
Especially now with new changes likely to bode positively for the stock, “Our channel research suggests that this fiscal year has gotten off to a better start than prior campaigns with sales plans established early, changes to cloud to go market well in place after last year and large customers continuing to work with both the Oracle IaaS and PaaS as they implement hybrid cloud strategies,” explains the analyst.
For the first fiscal quarter of 2018, Senk angles for a 4.6% rise in total revenue to $9.0 billion, a 63% surge in cloud revenue to $1.1 billion, and a 9% increase in EPS to $0.60.
With the success of last quarter adding to Oracle’s momentum, Senk concludes with full optimism roaring: “We believe last quarter’s database growth supports our view that the install base is sticky and, despite both the public grumbling on support cost and the noise out of Amazon […] is not planning a wholesale move away from Oracle. We have yet to speak with a sizable Oracle customer that is looking to move completely off the platform. This is what drives our thinking that Oracle has a real opportunity to emerge from this transition as a relevant company and remains a driver of our positive view on the stock.”
Wall Street aligns with Greenblatt’s bullish boost in his holding as well as Senk’s confidence ahead of the print, as TipRanks analytics reveal ORCL as a Strong Buy. Based on 26 analysts polled by TipRanks in the last 3 months, 21 rate a Buy on Oracle stock while 5 maintain a Hold. The 12-month average price target stands at $56.50, marking a 7% upside from where the stock is currently trading.
iRobot Sees a Well-Timed Retreat
Considering iRobot crashed to the market floor almost 15% yesterday, and continues to freefall another almost 2% today, perhaps it was strategic foresight on the “Magic Formula” creator’s part to “[beat] the market” by getting rid of 87% of his stake in iRobot. With 17,852 shares left worth $1,502,000, Greenblatt is feeling less of a sting from iRobot’s slump that came on the heels of a short-seller calling rival SharkNinja “a credible threat to iRobot.”
With new rivalry fresh on iRobot’s tail, Shark Ninja made its way into the robotic vacuum arena one week prior with a contender at a competitive price: the $349.99 Shark Ion Robot 750. iRobot’s cheapest Roomba starts at $299.99 in juxtaposition, but ranges up to $899.99 for the higher-end model: the Roomba 890.
Therefore, Spruce Point Capital believes SharkNinja could make iRobot investors nervous, with strength in marketing savvy coupled with supremely engineered products with price tags that could intimidate consumers less. These were the very assets that first helped iRobot oust Dyson on the leaderboard in the battleground for upright-vacuum market share. Dyson’s cost exceeding $1,000 “was simply too high, and it did not deliver meaningful performance advantage to the customer.”
According to Spruce Point Capital, there is a new heavyweight in town- and investors are understandably taking note, promptly fleeing the iRobot scene as the competition intensifies.
Most are not convinced by the Roomba maker quite yet, considering TipRanks analytics indicate IRBT as a Hold. Out of 5 analysts polled by TipRanks in the last 3 months, all 4 are sidelined on iRobot stock. With a return potential of 12%, the stock’s consensus target price stands at $93.50.