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Published: September 13, 2010
Investors often look for stocks that are "selling below
book value." That's a fancy way of saying that the company's
stock market value is even lower than the assets (minus debts)
it has sitting on its
balance sheet. I've found three stocks that look good by an
even stricter measure. These companies are worth less on the
stock market than the cash,
accounts receivable and inventory sitting on their balance
sheet. These items are also known as
current assets. Add in their other assets, and these stocks
are super cheap.
Before we take a closer look, you should know that these
companies aren't so undervalued simply because investors are
unaware of them. Instead, investors simply find them to be
unappealing based on tepid operating trends. These business will
need to improve to see shares move sharply or management will
need to figure out ways to unleash those current assets to boost
shares, perhaps in the form of a big buyback. The real charm of
these stocks is that they are unlikely to get any cheaper, even
if the broader market tanks.
Audiovoxx (Nasdaq: VOXX)
This micro-cap (worth just $155 million) still meets my
threshold of talking about companies worth at least $200
million, because its current assets are worth well more. Roughly
speaking, this maker of consumer electronics has $100 million in
cash, in inventory and in accounts receivable. That adds up to
$300 million, or twice its market value.
Many of Audiovoxx's product lines are "me-too" products that are
often a cheaper version of more popular items such as stereos,
speakers, etc. That's not an especially appealing business, but
Audiovoxx has some real sizzle cooking: the company has signed
up a host of new customers for its in-car entertainment systems.
Ford (NYSE: F), GM, BMW and Chrysler have started
installing the company's rear-seat entertainment systems (at
dealerships), known as FLO TV. Roughly 5,000 dealers have been
signed up to install the systems.
But don't look for a buyback with all that cash. Management vows
to keep acquiring smaller industry players to broaden its
product lines. All it takes to get this stock moving is some
nice uptake on that in-car TV system, or some growth-inducing
acquisitions. Even without those catalysts, Audiovoxx is
profitable and should continue to bolster that impressive set of
current assets.
ADPT (OTC: ADPT)
At the moment, this company is nothing but a balance sheet. It
recently sold off several operating divisions, leaving it with
an empty
income statement while the company looks for ways to spend
its money. And it has plenty of that. After the recent asset
sales, the company has more than $3 a share in cash. Thanks to a
history of operating losses, the company has accumulated more
than $160 million ($1.30 a share) in Net Operating Loss
Carryforwards (NOLs), which effectively shield future income
streams from taxes. That could prove to be attractive to anyone
looking to buy out the company. Add the NOLs together, and
you're looking at around $4.50 a share in value -- more than
+50% above the current stock price.
This asset play has caught the eyes of investment firm Steel
Partners, which has steadily been buying shares on the open
market and now owns more than a quarter of the company. Steel
would like to find companies for ADPT to acquire. ADPT's
response? "We remain committed to providing value to all of our
stockholders and will aggressively pursue opportunities to
deploy the cash and liquid assets on hand to create value for
our stockholders, including exploring acquisitions of
businesses, engaging in stock buybacks, paying cash dividends,
or any combination thereof," noted the company in its last
10-Q.
In the absence of any concrete plans, investors should give ADPT
credit for all that cash and at least half of its NOLs, pegging
the company's value at around $3.75 a share. That's nearly +30%
above current prices.
Investors should know that while the company is not in operating
mode, its shares have been relegated to the
pink sheets. That means you should call your broker and
specify prices in which you are willing to buy the stock. For
example, shares currently trade for about $2.93, and you can
specify that you will not pay more than $3 for any shares.
Imation (NYSE: IMN)
This company, which was spun off from 3M (NYSE: MMM) in
the mid-1990s, sells a range of data storage and consumer
electronic products, from magnetic tape devices to Blu-ray DVDs.
The company's best days are behind it, as annual sales likely
peaked at $2 billion in 2008 and now hover closer to $1.4
billion. But even as that level, this is a cash cow. Imation
routinely throws off more than $50 million in annual
free cash flow, which makes the balance sheet stronger by
the quarter.
In the most recent quarter, Imation had $250 million in cash,
$240 million in accounts receivable, and $220 million in
inventory. The company's $869 million in total current assets
dwarf the stock's market value of $370 million.
On the most recent conference call, management hinted that a
large stock buyback or a
dividend reinstatement may be in the offing. The company
used to pay out $0.50 to $0.60 a share in dividends before
suspending it during the financial crisis of 2008. A fresh $0.50
dividend today translates into a 5.6%
yield. By my math, the company could pay out a $1 annual
dividend, but instead will likely opt to split the difference
between buybacks and dividend payments.
Action to Take --> These are
truly "special situations" that activist hedge funds like to
pounce on, usually to unlock shareholder value. Just as Steel
partners is loading up on ADPT, legendary value investor Seth Klarman has been loading up on Audiovoxx. Follow their lead, and
you may see some tidy gains in these stocks. And they're so
cheap that you're unlikely to get burned.
-- David Sterman
Staff Writer
StreetAuthority |
