There are some investors who buy U.S.-listed stocks that are trading below their liquidation value because they believe there is a lot to gain in these stocks after the market reprices shares to near or above their liquidation value.
In theory, should the company encounter financial difficulties leading to bankruptcy, these shareholders could still benefit from the liquidation value distribution, which is expected to be higher than the purchase price. The liquidation value of these so-called net current asset value stocks is calculated as "current assets minus total liabilities."
Thus, short-term investors could be interested in the two companies listed below, as their stock prices are trading below their net current asset value (NAV) per share and they are recommended by Wall Street.
New Oriental Education & Technology Group Inc.
The first stock to consider is New Oriental Education & Technology Group Inc (EDU, Financial). Based in Beijing, China, the company operates 111 schools and 736 learning centers in mainland China.
The stock traded at $10.94 per share at Wednesday’s close, below the current NAV per share of $12.05.
Following an 89.33% drop that happened over the past year, the stock now has a market capitalization of $1.90 billion and a 52-week range of $8.40 to $112.
The education company is in the process of restructuring its operations in line with Chinese government significantly revising its education spending in recent months to promote high-quality education centers at the expense of other less efficient institutions.
This has prompted the education company to significantly downsize its portfolio of schools and learning centers over the past year. As of Feb. 28, 2022, the company operated 847 educational institutions, down 48% year-over-year.
Learning center closures and layoffs are currently driving higher overall costs, but this is temporary due to the restructuring process, said Stephen Zhihui Yang, the company's chief financial officer, commenting on the financial results of the fiscal quarter that ended on Feb. 28, 2022.
In its most recent fiscal quarter, the company posted a net loss of 56 cents per common share on total revenue of $614 million, down 48.4% year over year.
For the quarters to come, the company is relying on an encouraging trend observed in key businesses and positive momentum across many initiatives.
New Oriental expects the development of additional markets to contribute strongly to sales in the future. In terms of entering new markets, the company can count on two developments currently underway in China.
One is the higher number of Chinese students in the country's higher education institutions. This has doubled in the past decade, the Ministry of Education illustrated in a recent presentation.
The other is the country's goal of 1 million "intellectual property professionals" by 2025 (up from 690,000 currently). This encourages the establishment of ad hoc university faculties and specific education in elementary and secondary schools, as outlined by the National Intellectual Property Administration during a recent presentation. The organization added that publications and social media platforms for young Chinese and foreign students contribute to the development of the sector.
As of Feb. 28, 2022, New Oriental had nearly $3.5 billion in cash, equivalents and short-term investments, while $915 million was in term deposits.
New Oriental Education & Technology Group has an Altman Z-Score of 1.39, indicating distressed financials. This implies a possibility of insolvency within the next two years.
As of May, the stock has eight strong buy recommendation ratings, 15 buy recommendations and two underperform recommendation ratings on Wall Street.
M/I Homes Inc.
The second stock short-term investors could be interested in is M/I Homes Inc. (MHO, Financial), a Columbus, Ohio-based builder of single-family homes across several states in the U.S.
The stock traded at $45.17 per share at close on Wednesday, which is below the current NAV per share of $49.45.
Following a 35.70% decrease that occurred over the past year, the stock now has a market capitalization of $1.28 billion and a 52-week range of $40.30 to $71.22.
The U.S. Federal Reserve's accommodative monetary policy to support the economy during the beginning of the Covid-19 pandemic led to higher demand for mortgages, which pushed up home selling prices.
This price development resulted in improved financial results for M/I Homes. In the first quarter of 2022, the homebuilder reported higher diluted EPS (up 11% year-over-year to $3.16) on revenue of $861 million (up 4% year-over-year).
Significantly higher selling prices allowed the company to mitigate unprecedented labor challenges and supply chain issues that, while resulting in a significant drop in home deliveries and new contracts, did not impact the company's profitability in any way. Relevant metrics include an improvement in gross margin of 40 basis points to nearly 25% of total revenue and an improvement in overheads ratio of 50 basis points.
In addition, despite a reduced number of communities and sales in most of them, the company has achieved record backlog units and record backlog sales values, according to CEO Robert H. Schottenstein.
Higher selling prices are expected to continue in the coming quarters, helping M/I Homes to unlock growth potential from its record inventories. Because of this, the CEO believes 2022 will be a continuation of the good things seen in the first quarter.
Many may think that tightening monetary policy to combat runaway inflation will be depressing for U.S. homebuilders because of the impact on mortgage demand. On the contrary, the company is likely to see positive trends in sales and margins even in a higher interest rate scenario.
Higher interest rates are unlikely to hurt M/I Homes Inc.'s business as the homebuilder stands to benefit from a market that more than ever views real estate as an investment to protect against current headwinds and an uncertain future.
Moreover, while housing demand still exceeds supply, housing more people in single-person households for cost-sharing should support sales volumes.
As of March 30, 2022, the balance sheet had $220 million in cash versus $950 million in total debt. M/I Homes has an Altman Z-Score of 3.74, which strongly indicates that the company is in safe zones from a financial perspective.
As of May, the stock has two strong buy recommendation ratings and one buy recommendation rating on Wall Street.
