- They are a slow growth company. There are so many companies out there with better growth.
- The stock has gone nowhere in a decade.
- The management team is not the best (to put it lightly)
- Management will squander the money
- A highly paid hedge fund consultant said CA is where good technology goes to die.
When I looked at CA I saw a company that was trading at less than seven times free cash flow (FCF/EV) or a greater than 14% cash yield. If the company is able to consistently generate so much cash despite the fact that they don't have good management than the underlying business must be really great. Where a stock has traded in the past decade matters little to me. If we were able to simply extrapolate the past into the future we would all be rich. Management had already committed to return 40%-50% of free cash flow to investors so at most they could squander half the money. A 7% cash return was still not bad.
The mistake most made in their analysis of CA is that they completely ignored valuation. There is no price at which they would have liked this stock. I would love it if CA grew like Salesforce.com but the free cash flow yield on Salesforce.com is a fraction of CA's. Salesforce.com would need to increase their free cash flow many times over before they yielded as much as CA. I prefer a bird in the hand.
I have been holding CA for over a half a year, all the while hearing about what a terrible stock it was. It was not a pleasant experience but as a value investor and a contrarian I am used to it. After earnings last night CA broke out to a multi year high. CA has solidly outperformed nearly every large cap software stock during the period I have owned it and the market as a whole. Value wins out in the long run and for CA the long run has finally arrived.