Benjamin Graham was in love with the companies which traded below liquidation value. He constantly picked a diversified portfolio of stocks trading at working capital, net working capital and net cash level. Today, people are getting scared off from the stock market, which is why we can again find several good stocks that Graham would love.
One good “cigar butt” stock that I’m writing about today is Genco Industries (GENC, Financial), the leading manufacturer of heavy machinery used in the production of highway construction materials, synthetic fuels and environmental control equipment. The company has two manufacturing sites, one in the U.S. and the one in the UK.
The business is quite seasonal. It is reported that the majority of orders for Genco’s products are received between October and February, with a significant volume of shipments occurring before May. Because it is involved in highway construction industry, the demand for Genco’s products mainly fluctuates with the level of government funding for domestic highway construction and repair, and infrastructure development in emerging economies.
Regarding the level of profitability, for the previous 10 years, it has had only one year of negative net income, in fiscal year of 2009, and the rest were profitable. That is why the company could grow its book value from 26 cents per share to $10.28 per share within 10 years, making annual compounded growth of 44.4% per year.
Regarding financial health, it has a very strong balance sheet and is very liquid, with nearly 72% in cash and marketable securities. The company is very conservatively financed, with only 8% in total liabilities, no long term or short term debt. In terms of dollar value, in June 2011, it had total cash and marketable securities of around $83 million, with no interest-bearing debt. With the market capitalization of $68.15 million, the enterprise value of the company stays at -$14.85 million.
Benjamin would definitely consider this stock to be in the basket of his portfolio. The net cash level (when we take cash minus total liabilities), it is at $72.4 million, 6% more than its current market capitalization. And the proxy for liquidation value (which we take current working capital minus total liabilities) is around $95 million, trading nearly 40% more than its current market capitalization.
With the stock trading below net cash level, and with the negative enterprise value, it means if we buy a whole company, we would right away benefit $14.85 million more. And if we liquidate its inventories, receivables, giving away its fixed asset for free, we would get around $27 million in total. Additionally, if we leave it there, it is still earning money, and the TTM P/E is staying at 10x right now.
Disclosure: Long GENC
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
One good “cigar butt” stock that I’m writing about today is Genco Industries (GENC, Financial), the leading manufacturer of heavy machinery used in the production of highway construction materials, synthetic fuels and environmental control equipment. The company has two manufacturing sites, one in the U.S. and the one in the UK.
The business is quite seasonal. It is reported that the majority of orders for Genco’s products are received between October and February, with a significant volume of shipments occurring before May. Because it is involved in highway construction industry, the demand for Genco’s products mainly fluctuates with the level of government funding for domestic highway construction and repair, and infrastructure development in emerging economies.
Regarding the level of profitability, for the previous 10 years, it has had only one year of negative net income, in fiscal year of 2009, and the rest were profitable. That is why the company could grow its book value from 26 cents per share to $10.28 per share within 10 years, making annual compounded growth of 44.4% per year.
Regarding financial health, it has a very strong balance sheet and is very liquid, with nearly 72% in cash and marketable securities. The company is very conservatively financed, with only 8% in total liabilities, no long term or short term debt. In terms of dollar value, in June 2011, it had total cash and marketable securities of around $83 million, with no interest-bearing debt. With the market capitalization of $68.15 million, the enterprise value of the company stays at -$14.85 million.
Benjamin would definitely consider this stock to be in the basket of his portfolio. The net cash level (when we take cash minus total liabilities), it is at $72.4 million, 6% more than its current market capitalization. And the proxy for liquidation value (which we take current working capital minus total liabilities) is around $95 million, trading nearly 40% more than its current market capitalization.
With the stock trading below net cash level, and with the negative enterprise value, it means if we buy a whole company, we would right away benefit $14.85 million more. And if we liquidate its inventories, receivables, giving away its fixed asset for free, we would get around $27 million in total. Additionally, if we leave it there, it is still earning money, and the TTM P/E is staying at 10x right now.
Disclosure: Long GENC
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
