MARK THOMAS
CHIEF INVESTMENT STRATEGIST
VALUE STOCK TIPS

COMPANY: Lazard
TICKER: LAZ (NYSE)
PRICE: $44.57 (as of 4 p.m. yesterday)
52-WEEK RANGE: $20.40-$46.06
MARKET CAPITALIZATION: $1.67 billion

Mark Thomas is the chief investment strategist at Value Stock Tips (www.valuestocktips.com), an email newsletter alert service that delivers stock tips to subscribers daily. Lazard is a financial advisory and asset management firm. Mr. Thomas spoke to David Dalley of The New York Sun about why he believes Lazard stock could increase in value by at least 20% over the next 12 months.

What does Lazard do?

They’re a very old, very established investment bank. They just went public in the last year and a half, at around $24. Everyone on Wall Street knows the name, but the stock is relatively new. Its focus is on investment banking, particularly mergers and acquisitions, but it also has an asset management division. I call it the best pure play on the mergers and acquisitions area.

Why do you like the stock?

On my newsletter I’m value-oriented. I try to beat the market with less risk. So I have this formula. A lot of people look at price to sales. I looked at enterprise value divided by revenue.

Can you explain the formula?

I calculate the market cap of the stock, add net debt to that, and then divide that number by revenue. When I do that on this stock, at $44, I get 2.54 billion divided by 1.38 billion, which equals 1.84. The lower the ratio, the less risky the stock. I look for stocks with a ratio less than 2.

Why is a low ratio better?

What we’re doing here, when we divide enterprise value by revenue, is calculating what valuation the market currently assigns the company. If someone was buying the entire company, this is what they’d be looking at.

Most times when you’re buying a business, you have to pay about three to five times revenue. So whenever the stock is over 3, I’m weary, and when it’s over 5, I’ll never buy. I also look at what the ratio is like compared to similar companies in the same sector.The big investment banks trade at about 2.3 to 2.6 times revenue. So according to that, this stock is at least 20% undervalued.

What do you think the stock’s worth?

I found it at about $36. It’s now at around $44, and that’s still about 20% undervalued. On that basis, my target price is about $53. In the next 12 months, I believe it could get there.

What are the risks?

If something happened to slow the mergers and acquisitions market down, that’d hurt. For example, significantly higher interest rates, a loss in confidence due to a terrorist attack – something like that.

The key when I pick something like this is that I know the potential reward: $9. Then I say to myself, what is the downside? I want a 2-to-1 reward-to-risk ratio. So if this stock fell below $39.50, I’d sell. That gives me $4.50 in downside and $9 in upside.