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Rupert Hargreaves
Rupert Hargreaves
Articles (486)  | Author's Website |

A Net Net Stock Trading at 10% of Book

Is this stock the only deep value investment left?

August 30, 2017 | About:

With the market trading near all-time highs and the second-richest valuation in history, it's no surprise that there are almost no deep value stocks out there.

Deep value is not entirely extinct just yet; there are still opportunities out there. You just should do extra research and be prepared to invest in some of the market's smallest and most illiquid companies.

Many of the companies currently showing up as offering deep value are China based so extra caution should be used to weed out these businesses. Also, there are many early stage biotech companies currently trading at a discount to net asset value. Depending on your level of experience with the pharmaceutical industry and understanding of these companies' treatment pipelines, they might be potentially attractive investments.

Two examples are Adverum Biotechnologies Inc. (NASDAQ:ADVM), which has a market capitalization of $119 million, an enterprise value of -$78.4 million and a book value per share of $5.2, or $216 million, substantially all of which is cash (comprised of $222 million in cash, net fixed assets of $4.3 million and working capital of $215 million), and Catalyst Biosciences Inc. (NASDAQ:CBIO), which had a market capitalization of $14.7 million, an enterprise value of -$11.9 million and a book value of $30.3 million at the end of the second quarter, equal to $7 per share.

Away from the biotech sector, if you're interested in dirt cheap net net stocks, the cheapest light stock (excluding dark stocks that don't report to the SEC) is STR Holdings Inc. (STRI).

Trading at 10% of book

STR is a provider of encapsulants to the solar industry. These products are used to protect solar cells and hold solar modules together. Low-cost Chinese competitors have obliterated the company's profits and revenues over the past five years, but the firm continues to try and turn itself around.

The sheer value on offer here more than makes up for the company's problems. With a market capitalization of $3.3 million and an enterprise value of -$10.1 million, shares in STR are trading at a huge discount to the value of the company's cash reserves. The company was carrying $12.4 million in cash at the end of 2016. Total working capital was $17.2 million with fixed assets of $14.2 million. Book value in total amounted to $31.4 million, or $1.63 per share. Even though the firm has failed to report a profit for the past five years management has cut costs to the bone, and for the previous two years, cash outflow from operations has been less than $200,000 in total. At a price of 17 cents per share, STR is trading at around 10% of its breakup value, making it possibly one of the cheapest stocks on the market today.

Cash rich

If STR seems too risky for you, another nonbiotech deep value play is Emerson Radio Corp. (MSN), which designs, sources, imports and markets a range of houseware and consumer electronic products.

Emerson is another business that has struggled with rising competition in recent years. Over the past six years revenue has shrunk at a compound annual rate of 33.5% per annum and for the previous two years, the company has reported losses.

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Still, like STR, Emerson’s management has aggressively cut costs, and cash outflows have been insignificant. These actions haven’t stopped investors from dumping the stock and today it trades at just 0.6x tangible book with a market capitalization of $31 million and an enterprise value of -$15.2 million. Interestingly, as sales have slumped over the past five years, the company’s cash balance has increased from $45 million at the end of 2012 to $52.5 million at the end of 2016. It looks as if this increase in cash is a result of inventory liquidation. Company working capital declined from $64.4 million in 2012 to $56 million at the end of 2016, and book value decreased by a similar amount. Emerson has virtually no fixed assets ($900,000), and much of the company’s $1.98 per share book value is cash.

Disclosure: The author owns no share mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert was as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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