In the small- and micro-cap section of the market, there's a whole selection of companies that are trading at what look to be deeply discounted valuations right now.
Negative enterprise value has been a great indicator of value in the past, and there are a number of companies dealing at a negative enterprise value today, like HC2 Holdings Inc. (HCHC, Financial).
Unique business
HC2 is a unique business. This is a holding company for a selection of businesses across different industries. The group has a manufacturing division, marine services, insurance, telecommunications, utilities, life sciences and other businesses, which makes it quite difficult to value. Because of the regulatory requirements of its insurance business, the group has a lot of cash on the balance sheet, which translates into a negative enterprise value. The $113 million market cap company has around $3.6 billion of cash and a book value of $243 million.
It currently has a negative enterprise value of $3.4 billion. It is trading at a price-book value of 0.5 and a price-free cash flow ratio of 0.3.
Based on first-quarter 2019 figures, the company's book value per share is $5.3. Last year the company earned $3.3 per share after several years of losses, although Wall Street believes it will return to a loss-making position during 2019 and 2020.
Surging profits
Another negative enterprise value stock that might be worth a second look is Evogene (EVGN, Financial).
I usually stay away from biotechnology companies when looking for deep-value equities because, while they may seem cheap at the time, generally speaking, they tend to have a high level of cash burn and uncertain future as they progress towards the commercial development of the treatments.
However, with Evogene, the company looks to be on the edge of a substantial improvement in its fortunes. The company is developing products to improve crop yields, and after many years of losses, Wall Street believes the company will earn a net profit of $27 million in 2019, or $1 per share, rising to $107 million and $4 per share by 2020.
Based on these forecasts, the stock is trading at a forward price-earnigns ratio of just 1.6. On top of this, the company had a net cash balance at the end of 2018 of $55 million. That's compared to the current market capitalization of $40 million. It has a negative enterprise value of $8 million. At the end of 2018 book value per share was $1.9, so at the time of writing the stock is trading at a price-book value ratio of 0.8.
Share buyback
Another company with a negative enterprise value is Nova LifeStyle Inc. (NVFY, Financial). This manufacturer of styled residential furniture has revenues of around $90 million and a robust balance sheet stuffed full of cash.
At the end of the first quarter of 2019, the company reported a total cash balance $50 million, up from $1 million at the end of 2018 thanks to working capital movements. Book value per share at the end of the first quarter was $2.61, implying that at the time of writing the stock is trading at a price-tangible book value of 0.3. The market capitalization is around $21 million, and it has a negative enterprise value of $30 million.
What's interesting about Nova is that management is actively looking to increase shareholder value here. At the beginning of June, the company announced a share repurchase program to buy back $2 million shares, deploying some of its substantial cash balance. Commenting on the buyback, CEO Tawny Lam said:
"The Board of Directors and management team believe that our current stock price is substantially undervalued and it is an attractive investment opportunity for us to repurchase our shares as an important part of our capital allocation strategy."
Disclosure: The author owns no share mentioned.
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