I occasionally like to search the market for deep-value stocks that meet the criteria initially proposed by Benjamin Graham for finding undervalued securities.
This is partly for fun and partly my attempt to find some securities that are deeply undervalued compared to the rest of the market. I like to keep around 10% to 25% of my portfolio in deep-value stocks, with the rest allocated to high-quality equities and index funds. It is always interesting to see if there are any new companies I can include.
Deep-value stocks
According to my research, there is a handful of micro-cap stocks that currently look cheap based on Graham's preferred metrics. I should caution that most of these companies are illiquid micro caps and might not be suitable for every investor. With that in mind, if you are not interested in deep value and illiquid micro-cap stocks, look away now.
Discount to book
If you're still reading, the first company I am going to profile is Westell Technologies Inc. (WSTL, Financial). This $27 million microcap provides in-building wireless, intelligent site management, cell site optimization and outside plant solutions. In other words, the company produces and manages wireless infrastructure.
Since 2014, revenue has been steadily declining. It has fallen from around $102 million to $44 million for 2019. The company hasn't made a profit for at least six years. Still, it doesn't look cheap. The stock is currently trading at a price to tangible book ratio of 0.7, and it has an enterprise value of around $2 million. The book value of $2.68 per share is made up mostly of cash ($25.5 million), fixed assets and working capital.
Interestingly, while the business isn't profitable, it has generated a positive cash flow in each of the past four years. In 2016, the stock reported a year-end cash balance of $14 million. This has since risen to $25.5 million thanks to substantial cash inflows from asset sales and operations.
Merger arbitrage
Sticking with cash-rich, undervalued equities, TheStreet Inc. (TST, Financial) also appears to be deeply undervalued at current prices.
After several years of losses, the company, which owns financial website TheStreet.com, reported profits in 2017 and 2018 and has recently inked an agreement to be acquired by Maven (MVEN, Financial). This is more of a special situation than a deep value play. A subsidiary of Maven will acquire all of the outstanding common shares of TheStreet for $16.5 million in cash, but there will also be an additional cash consideration component to the deal.
When the deal closes, Maven says it will distribute a large chunk of cash to TheStreet's shareholders via a special dividend, returning some of the $118 million of net cash on the company's balance sheet at the end of first-quarter 2019.
According to Maven's calculations, shareholders can expect to receive a total of $6.19 to $6.47 per share, including both the deal price and additional cash return. That's compared to a current stock price of around $6. The deal is expected to close in the third quarter of 2019.
Negative enterprise value
The last deep-value company I am going to profile is Support.com Inc. (SPRT, Financial), a provider of cloud-based software and services for technology support. The company is loss-making on an accounting basis, but is profitable on a cash basis.
At the end of 2018, the company reported a net cash balance of $49.6 million and a positive free cash flow from operations of $600,000 for the year. The healthy cash balance gives the company a negative enterprise value of $17.6 million. It is currently dealing at a price to tangible book value of 0.6, with working capital making up virtually all of the $2.26 book value per share.
Disclosure: The author owns no stocks mentioned.
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