15 Deep Value Plays

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.

Comments

[Alan Brochs...:]

I own SCVL and have written positively about it on Seeking Alpha in the past. It, along with many other retailers, has gotten cheaper. I went back and reviewed some historical data for retailers and found that they tend to bottom at 0.5X tangible book value. Interestingly, often the entire balance sheet equity value of the firms tends to be in inventory. I would gather that as the small retailers are able to convert some of the inventory to cash in coming quarters, investors will pay more for the stocks. The issue to watch out for is losses or write-downs. In the case of SCVL, I am hopeful that they can preserve book value.

I have followed TECD and IM for many years, though not so closely recently. Investors must understand that they are banks to their clients. It will be very important to monitor AR. Also, they do take inventory price risk as well. In the case of TECD, the AR in the most recent quarter was 150% of equity and the Inventory was 120% of equity, so be careful. In the case of IM, the metrics are better, but they have a lot of intangibles. As a ratio to tangible equity, AR as of 9/30 was 120% roughly, and the ratio of Inventory was about 90%. IM appears to be doing a better job than TECD of getting these items down relative to sales recently. Clearly the market has priced in something, though, as both of these stocks are, as you point out, cheap to net working capital and they are also quite cheap to book value.

Feb 15 08:43 AM

[Did U Think...:]

Nothing really matters when there is a deflationary crash because the money supply contracts with the destruction of credit. This messes with the earnings of all companies and until salaries and costs are adjusted downward to meet the new reality the companies will be falling in share price.

Feb 15 09:55 AM

[Financial A...:]

Wow, thanks Cam! I didn't know Yahoo Finance had such an outstanding stock screener. SKX looks excellent, thanks again!

Feb 15 12:24 PM

[throwerw:]

Hi, thanks for writing this article. I'm a young investor that has just recently come across this method of investing. I've been using a screen I found on grahaminvestor.com, but there are obvious limitations to it. how exactly do you create a screen that uses items on the balance sheet? thanks

Feb 15 02:18 PM

[Rob Viglione:]

Retailers scare the heck out of me, but there will always been some price that warrants reasonable risk-adjusted value. Good preliminary analysis!

My preference has shifted largely towards dividend payers. Value analysis is certainly a useful approach in this market.

Feb 15 10:13 PM

[Cam Hui:]

Financial Acumen -

Yahoo Finance doesn't have that kind of stock screener. I had to build software to pull the data from the website and build the screen myself.

Feb 16 11:57 AM

[tagthatstock:]

FUQI has some smoke and mirror math going on hense the cashflow data
Cash Flow Statement
Operating Cash Flow (ttm): -30.85M
Levered Free Cash Flow (ttm): -51.12M


ZINC on the other hand doesnt and the company has tried to protect themselves best they could buying puts for industy protection.

FUQI was brought to my attention when i noticed it on a pump and dump site. right now is a buyers market and the buyer can demand quality.

Feb 22 05:54 AM