- What is/are the main issue(s) in the case?
The main issue in this case is the difference between the implied values attributable to the Cypress business vs. the actual market value. This means the share price of Cypress Semiconductor is mispriced which gives an opportunity of arbitrage. The stub valuation poses an opportunity to any speculative investor to get some potential high returns in short term.
As Cypress holds both its own stock as well as SunPower stock, it creates a portfolio of stock for Cypress which is less risky as one company is meant to do well in short term and the other in long term future.
2. How does the current market value of Cypress compare to the market value of its assets?
The current market Valuation/capitalization of Cypress semiconductor = $27.37 X 152.71 Million shares= $4.1b. The market value of its asset is = $3.75b which is not very different from its market capitalization that tells that Cypress is not overvalued.
Given the positive outlook of the company in coming future it can be a very good investment proposition.
Current market Valuation /capitalization of SunPower = $86.8 X 84.39 Million shares = $7.3b and the market value of its asset is $1.6 b. The ratio is almost 5 times overvalued which as per the market feeling is correct price given the great future for solar energy market . As the market expects the company to do well, the stock price has already reached high level. It is not a very good short term investment opportunity.
3. What investment strategy should Dirks use?
Dirks needs to put some money (40%) in short term securities and rest in long term securities. If in the market there were only two types of shares called SunPower and Cypress, Dirks should put his money in Cypress stocks for short term gain as the stock is undervalued and given the future prospect of the company it can only go high in the coming days.
The long term investment should be in SunPower stocks. Because of green energy rules and long term increase of Solar Energy demand SunPower will certainly do well as long term stock. However, as short term stock it may not go up quickly as it is already overvalued by the market. Investing in this way Dirks can hedge the risk of investment as well.