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Stocks Trading Below Net Cash: Adaptec Inc (ADPT), AuthenTec Inc (AUTH) and Cutera Inc (CUTR).

As S&P 500 earnings have started their collapse (see articles here and here), there has been a debate about whether this market constitutes good value. From a bottom up basis, however, I am seeing values that I haven’t seen in a long time.

Screening on net-net working capital

Using the free data from the Yahoo! finance website, I wrote a program that screened an investment universe that is roughly equivalent to the Russell 3000 members. The test is: stocks that trade below net-net working capital (current assets less all liabilities and preferred) and has positive trailing 12 month earnings. The net-net working capital requirement is a classic Ben Graham deep value criteria. The earnings test represents an additional margin of safety of corporate viability.

I got 39 names. Even if I threw out the microcaps (market cap below $100 million), I still got 13 stocks that passed the test:

Adaptec Inc (ADPT), Cynosure Inc (CYNO), Fuqi International Inc (FUQI), Horsehead Holding Corp (ZINC), Ingram Micro Inc (IM), Movado Group Inc (MOV), Olympic Steel Inc (ZEUS), PC Connection Inc (PCCC), Shoe Carnival Inc (SCVL), Skechers U.S.A. Inc (SKX), Tech Data Corp (TECD), Tecumseh Products Co (TECUA) and Volt Information Sciences Inc (VOL).

Stocks trading below net cash

Using the more restrictive criteria of non-financial stocks trading below net cash (cash less short and long term debt) and that are earnings positive, I got three names:

Adaptec Inc (ADPT), AuthenTec Inc (AUTH) and Cutera Inc (CUTR).

Two of the three trading below net cash are Technology stocks. This is confirmed by a recent story stating that many Tech companies are sitting on large cash hordes.

On a slightly unrelated note, a recent paper by Dino Palazzo shows that shares of companies with large amounts of cash exhibited higher returns.

Value in this market

I would disagree with those who say that there isn’t value in this market. There are good fundamental values to be found for investors who are willing to dig around and these screens support my contention that the downside risk to this market is limited.

Disclaimer: The caveat to these lists is that they represent a starting point for further research and you should not blindly go out and buy them without further investigation.

Cam Hui

humblestudentofthemarkets.blogspot.com


Editor Note: GuruFocus has made available a set of tools for individuals to conduct further research in the listed companies. Click here to see the tool set on stock Adeptec Inc(ADPT). Change the symbol at the top bar for other stocks.

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Comments

WideMoat
WideMoat - 5 years ago
Thanks for these ideas.

Pabrai is also seeing value in ZINC at these levels. Horsehead does have some of their future zinc sales hedged, but it remains to be seen where these metals bottom in this cycle, and for how long.

widemoatinvesting.wordpress.com
cm1750
Cm1750 premium member - 5 years ago
I have done a lot of work on ZINC - if Zn prices go back below $0.60, there is not a lot of upside.

However, if you think global growth will come back and Zn reaches $0.80, ZINC could see $11-12 as they are moving all their production to low-cost recycled EAF dust and can sell the iron byproduct for a pretty nice price ($100/ton).

Historically, Zn has averaged $0.50 over the past 10-20 years (pre-global boom).

Pabrai probably see the assets being worth $500MM and the large cash balances as a floor. However, at under $0.60 for Zn, noone would want to pay much for the PP&E as the FCF generation on these assets is just not there. Also, the cash is being largely used for the new EAFD plant expansion.

DaveinHackensack
DaveinHackensack - 5 years ago
"Even if I threw out the microcaps (market cap below $100 million)..."

Why would you want to throw them out? Because they're not as safe as blue chips like AIG, C, or BAC?

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