In this kind of bear market, the phrase “throwing the baby out with the bath water” gets used quite frequently. However, there are some stocks that are truly worthy of this claim. Small caps in particular present some intriguing values with shares of profitable companies trading at a discount to tangible book value. Why consider buying opaque financial assets at pennies on the dollar when there are real companies, with little to no debt, that can be purchased at similar markdowns?
Our screens found five companies, in different industries, that are currently priced at significant discounts to tangible book:
- Actions Semiconductor (ACTS) - Friday’s closing price puts ACTS at an implied $0.55 on the dollar, which would yield an 82% return if the stock returned to 1x tangible book value. On Thursday, Actions reported a decent profit of $0.09/share on virtually no revenue growth due mainly to weaker end market demand in consumer electronics. That’s the bad news. On the flip side, management has demonstrated control over expenses and has met recent gross margin targets. In addition to an 8 million share repurchase plan (10% of shares outstanding) and no long term debt, the majority of Actions’ tangible book value is in cash and equivalents ($250 million vs. market cap of $157 million).
- Qiao Xing Mobile Communication (QXM) $0.36 / 176% - A second Chinese company on the list, Qiao Xing designs and distributes cell phones in the People’s Republic. Its service providing sister, Qiao Xing Universal Telephone (XING) also trades at a similar valuation. With QXM’s end market entirely in China, the company has some resistance to the global slowdown. Qiao Xing saw diluted EPS of $0.12 in the second quarter, but attributed much of the slowdown to the Sichuan earthquake on May 12th. Management believes EPS should be stronger in Q3 despite macroeconomic softness.
- Spherion (SFN) $0.62 / 60% - Many investors would say that it’s perfectly reasonable for a North American staffing company to trade below tangible book value in the midst of one of the worst recessions in recent memory. With Q3 earnings dropping 50% to $0.08/share, there are some issues with which to be concerned. However, Spherion showed an ability to navigate a jobs recession in 2003 with minimal losses. This time around, SFN has no long term debt and management is aggressively tackling costs to stay lean during a contracting job market.
- Tiends Biotech Group (TBV) $0.55 / 82% - In 2004, Tiends traded above $10/share and well above tangible book. While TBV is considered a “healthcare” company, they primarily develop and manufacture dietary supplements and other wellness products. 41% of the company’s revenue comes from China, with the remainder coming from a variety of countries across the globe, particularly developing economies. Q2 EPS came out flat year over year at $0.07/share and there has been some gross margin compression (but it was still in the neighborhood of 70%), so there are reasons to be concerned. For a stock that trades at nearly half tangible book and 13x quarterly EPS, those concerns have been discounted.
- Horsehead Holding (ZINC) $0.45 / 121% - In the case of Horsehead Holding Corp, the ticker says exactly what you’re getting – a Pennsylvanian producer of zinc and related products. Given the dollar’s recent comeback and commodity price plunges, it comes as no surprise that ZINC has been especially pulverized by this bear market. The company has announced production cuts at costly furnaces while investing in more efficient zinc recycling plants. Horsehead has no long term debt but some investors are concerned about its liquidity. Cash on hand can cover roughly two-thirds of COGS in a given quarter. As management seeks to slow some capital expansion projects, these liquidity concerns will ease. The hard assets of ZINC represent a safer way to express a bullish view on commodities or a bearish view on the dollar going forward. For more information on ZINC, see this recent article.
Disclosure: Author holds long positions in QXM and ZINC