It wasn't uncommon for Ben Graham, the creator of value investing, to invest in stocks in which the liquid assets on the balance sheet (net of all debt) were worth more than the total market capitalization of the company (also known as "net nets" to Graham followers). This means that Graham was effectively buying businesses for nothing, and in some cases, for less than what the businesses would sell at auction.
For this article, we focus on what Ben Graham called “secondary stocks”. We define a secondary stock as one having no claim to fame, prominence, or general popularity. Hence, it is likely to be ignored by the stock market generally and left for dead when the disparity between price and intrinsic value may in fact be the greatest. There is no guarantee or law of market action by which the price can be counted upon to adjust itself eventually to its intrinsic value. Therefore, our focus is on companies with a catalyst in place. These are our picks:
GSI Group Inc. supplies precision motion component products, lasers, and laser-based manufacturing systems to the electronics, semiconductor, medical, aerospace, and industrial markets worldwide. Its Precision Technology segment offers lasers that are used for welding, cutting, drilling, surface marking, and engraving of metal and plastic parts.
As of Tuesday’s close, GSIG had a market cap of roughly $33M, with a reported $183M in cash. However, the Company announced on December 4, 2008, that it had identified errors in the recognition of revenue from sales to a customer in the first and second fiscal quarters of 2008 in the Company's Semiconductor Systems Segment. Therefore, Form 10-Q for the periods ended March 28, 2008 and June 27, 2008 should no longer be relied upon. Though the company seems cheap in the books, investors should be aware that these numbers are simply not reliable at the present time.
But the catalyst we have identified gives us a bit more confidence that the company is indeed cheap, despite its accounting troubles. Stephen W. Bershad, the CEO of Axsys Technologies (AXYS), recently filed a 13D, an activist filing, after buying 3.3 million shares of GSIG in the open market. Because Bershad’s position as a CEO of a major defense contractor, and an industry insider with extensive knowledge in the defense industry, makes it likely that GSIG is at least undervalued.
Ocean Power Technologies, Inc. engages in the development and commercialization of proprietary systems that generate electricity by harnessing the renewable energy of ocean waves. The company’s product portfolio includes utility PowerBuoy system, which is designed to supply electricity to a local or regional electric power grid; and autonomous PowerBuoy system that is designed to generate power for use independent of the power grid in remote locations. Its customers include public utilities, independent power producers, and other governmental entities and agencies.
The company has a market value of $54.6M (5.35/share) with $55.4M in current assets, of which nearly 53.4M is in the form of cash or cash equivalents. Total equity is roughly $87M, of which $32M is in the form of long-term investments.
The catalyst is that according to Reuters, the Federal Energy Regulatory Commission has issued some 170 preliminary permits for 10,000 megawatts of potential power generation from offshore projects. One of those is an OPTT project off the Oregon coast, which will create a 1.5 megawatt power station to supply electricity to about 2,500 homes. The project would have 10 buoys with pistons in a cylinder to slide up and down as the buoys move over waves in the water, generating electricity in the process. An underwater cable would then transmit the power.
The negative is that after visiting OPTT headquarters in Pennington, NJ a few months ago, I was unimpressed with the quality of the buoys. Corrosion is a big issue still unsolved, and maintenance costs associated with placing and retrieving floating buoys in the open sea is extremely high. Therefore, operating expenses are a threat to the little cash the company has on its balance sheet.
SoundBite Communications, Inc., an automated voice messaging services provider, engages in the provision of on-demand, integrated multi channel communications solutions in the United States. It offers integrated voice, text, and e-mail messaging solutions that enable clients in delivering the message to the customer. The company offers its services to various organizations in industries, such as collections, financial services, retail, telecom and media, and utilities to send messages annually for collections, customer care, and sales and marketing applications.
The company has a market value of $25.4M (1.64/share) with $45.3M in current assets, of which nearly $37.4M is in the form of cash or cash equivalents. Total equity is roughly $47.5M. As of Tuesday’s close, the company is trading at a 55% discount to its cash holdings with no outstanding debt.
Though there is no active catalyst for SDBT, venture capital firms NBVM GP LLC, Mosaic Venture Partners LP, and Commonwealth Capital Ventures LLP own more than 50% of the company’s shares. In my view, these venture firms will not hesitate to liquidate the company if it runs into trouble in the future, since shareholders will at least be getting the cash it has on its balance sheet.
Inhibitex, Inc., a biopharmaceutical company, engages in the development of differentiated anti-infective products to prevent and treat serious infections. Its products include FV-100, a nucleoside analogue prodrug that is in Phase I clinical trial for the treatment of varicella zoster virus, the causative agent for herpes zoster, or shingles, and chicken pox; HIV Integrase Inhibitors class of anti-retroviral agents, which are in preclinical stage for the treatment of HIV.
The company has a market value of $9M (0.23/share) with $33.9M in current assets, of which nearly $33.1M is in the form of cash or cash equivalents. Total equity is roughly $30.4M. As of Tuesday’s close, the company is trading at a 72% discount to its cash holdings (0.76/share) with only 5.8M in total liabilities.
Though there is no active catalyst for INHX, the Biotech Value Fund owns nearly 13% of the company’s shares. The fund is particularly known for its current activist dispute with Avigen, Inc, where the fund is trying to replace the entire board of directors to improve shareholder value.
XTENT, Inc. is a medical device company focused on developing and commercializing innovative customizable drug eluting stent (DES) systems for the treatment of coronary artery disease (CAD). CAD is the most common form of cardiovascular disease and the number one cause of death in the United States and Europe.
According to the company’s latest 8-K, XTNT had cash, cash equivalents and short-term investments of $19.1 million as of December 31, 2008. with almost no debt. After certain adjustments to its balance sheet, we believe the company could be worth at least $15M in either liquidation or a merger. This represents a nearly 37% discount to the company’s current market value of $10M.
The catalyst is that on January 23, 2009, XTNT announced it plans to engage Piper Jaffray & Co. to help the company pursue strategic alternatives which may include the sale of some or all of the company’s assets or other types of merger or acquisition transactions intended to maximize shareholder value. the company notified 115 employees out of its total employment base of 121 employees that their positions would be eliminated effective March 23, 2009. This represents a 94% reduction in labor expenses, which will allow the company to slow the rapid cash burn of approximately $5M per quarter, and help preserve cash while it pursues strategic alternatives.
Technology Solutions Company provides business solutions for healthcare, manufacturing, and financial services industries in the United States. It offers business solutions primarily to the key processes and operations at the organizations.
On February 10, 2009, TSCC announced that its Board of Directors decided to liquidate the company's assets and to dissolve the company, after extensive and careful consideration of the company’s strategic alternatives and analysis of the prevailing economic and industry conditions. The Board estimated an initial cash payout of nearly $2.00 per share. However, my estimates show that nearly an additional $0.55/share will be paid out after liabilities and liquidation costs are accounted for.
Less Liabilities of 0.49
Less Liquidation costs of 0.38
Less initial $2.00/share payout
= $0.55/share payout remaining
At a current market value of $2.25/share, the company is trading at nearly 15% discount to its liquidating value.
Trident Microsystems, Inc. designs, develops, and markets integrated circuits (ICs) and associated software for digital media applications, such as digital television (digital TV), liquid crystal display television (LCD TV), and digital set-top boxes (STB).
The company has a market value of $91.2M ($1.45/share) with nearly $212M in the form of cash or cash equivalents. Total liabilities are $17.8M, so the company is currently trading at a 53% discount to its net cash value.
The catalyst is that New York investment partnership Spencer Capital Management LLC has indicated that it intends to nominate an alternate slate of candidates for TRID’s board. Spencer said its founder, Kenneth Shubin Stein, is leading the effort to restructure Trident's board with the goal of improving corporate governance and repositioning the company.
Athersys, Inc., a biopharmaceutical company, engages in the discovery and development of therapeutic product candidates in multiple disease areas in the United States. Its product pipeline includes ATHX-105, a Phase I clinical trial product for the treatment of obesity.
The company has a market value of $16.7M ($0.88/share) with nearly $31.6M in the form of cash or cash equivalents. With total liabilities are $2.3M, the company is currently trading at a roughly 50% discount to its net cash value.
The catalyst is that Ormibed Advisors, the world’s largest healthcare activist investment firm, is ATHX’s largest shareholder with a 20% ownership of the company’s shares.
VNDA is a biopharmaceutical company focused on the development and commercialization of clinical-stage drug candidates for central nervous system disorders, with exclusive worldwide commercial rights to three product candidates in clinical development. The Company’s product portfolio includes Fiapta (iloperidone), a compound for the treatment of schizophrenia and bipolar disorder; VEC-162, a compound for the treatment of sleep and mood disorders, and VSF-173, a compound for the treatment of excessive sleepiness.
According to the latest SEC disclosure, the company had $47.7M in current assets and total liabilities of $3.9M as of December 31, 2008. This means that with a net asset value of $43.8M ($1.64/share) and a market capitalization of $21.4M ($0.80/share) the company is currently trading at a 50% discount to its net asset value. VNDA has cash and cash equivalents of roughly $39M, for a net cash value of $35M (1.31/share).
The catalyst is that On February 13, 2009, shareholder Kevin Tang, Managing Director of Tang Capital Partners LP, filed an amended proxy material urging VNDA’s board to immediately cease operations. Mr. Tang has said he plans to nominate two members to the company’s board. The 13D notice discloses in the Election of Directors Proposal that Kevin Tang himself will be one of the board nominees, along with Andrew D. Levin, a principal at Tang Capital Management, LLC.
And our top pick is ... (drumrolls) …
Soapstone Networks is at the forefront of the movement to Carrier Ethernet by developing resource and service control systems that realize NGN software-provisioned services in the new Carrier Ethernet transport network. Soapstone’s common control framework decouples services from underlying network technologies. The Soapstone solution is designed to dynamically provision precise, SLA-quality services, continuously optimizing utilization of network resources to bring orderly, predictable business-driven behavior to service provider networks.
According to its December 31, 2008 SEC disclosure, the company has $90.4M in current assets and total liabilities of $3.1M. This means that with a net asset value of $87.0M ($5.88/share) and a market capitalization of $44.3 ($2.98/share) the company is currently trading at a nearly 50% discount to its net cash value.
On February 19, 2009, the company announced that is has engaged Morgan Stanley as its advisor to assist the company in exploring strategic alternatives available for enhancing shareholder value, including but not limited to, continued execution of the company’s business plan, the payment of a cash dividend to the company’s shareholders, a repurchase by the company of shares of its capital stock, the sale or spin off of Company assets, partnering or other collaboration agreements, a merger, sale or liquidation of the company. In either of those cases, SOAP is a winner.
Disclosure: We do not have a holding in any of the companies mentioned in this article.