Smallcaps Flush with Cash

In late 2002, as the Nasdaq’s brutal two and a half year slide finally came to an end, B. Riley’s research team created an index of 15 tech companies trading at or near net cash per share. It was titled the Cash Rich Technology Stock Index [CRTS I] and increased 326% over the next 19 months. In comparison, the Nasdaq increased 79% over the same period. In May 2005, B. Riley’s team generated a new list of companies to fill out the index. CRTS II produced an 18.6% return over the following 14 months, which significantly outperformed the Nasdaq (+1.1%) during that time.

The requirements companies must meet in order to be on the index are as follows:

1. Listed on the Nasdaq
2. Small or midcap stock
3. Net cash must be at least 35% of market cap
4. Cannot have a high cash-burn rate
5. Business model must be sustainable

On January 7^th 2008, B. Riley published CRTS III, which consisted of 29 stocks mostly concentrated in the semiconductor and communication equipment industries. Obviously, the timing of the publication was not as advantageous as the 2002 issue, which has led to the index’s current decline of 56%. Comparatively, the Nasdaq is also down 47% from its late 2007 high. Although, CRTS III has not yielded the same stellar results as its predecessors, we believe the methodology behind the index, coupled with better market timing, can be utilized to reveal some potentially tremendous winners as this bear market winds down.

The index follows one of the most basic and commonly heard market dogmas; cash is king. Especially during a tight credit cycle, a large cash reserve is vital for sustainability and investor confidence. With the credit market most likely to remain tight in the near term, we look for investors to flock to cheap, cash flush companies with high-quality business models.

The following stocks were picked using general guidelines set forth by B. Riley’s CRTS index with the one exception being the microcap, CLFD.

Disclosure: This article was co-authored by Andrew Florio, an analyst for The Inflection Point™.

Comments

[Jon Smirl:]

Intellon (ITLN) - Mkt cap $57M, cash $54M

Mar 31 10:58 AM

[TaurusTrader:]

TNA looks like the best way to play small caps in general ... In case of a market turn around, small caps would advance more rapidly than their counterparts in mid and large cap. Watch for volatility though!
TaurusTrader
www.tarustrder.wordpre...

PS: I have long call options in TNA

Mar 31 03:25 PM

[Alan Young:]

I like the idea, but....

(1) What is your definition of "high cash-burn rate"? I ask because at least half of your are big cash-burners by my measure: e.g., TLAB's EPS (ttm) -2.34 is a rate that will burn all their reported cash in about 8 months.

(2) There must be a reason all these companies are in the telecommunications equipment industry, and I'd need to learn more about the industry to find out why so many small players (and at least one mid-sized one) are hoarding cash like this.

Mar 31 04:30 PM

[User 382019:]

Another one is TRID. $212mm in cash, $85mm mkt cap.

Mar 31 06:00 PM

[laviojo:]

None of these have good earnings growth.

Apr 01 12:05 AM

[Joseph Ramelli:]

I wrote an article about BroadVision(BVSN) a few days back, a company that definitely fits B. Riley's criteria.

Apr 01 12:48 AM

[indefinitelee:]

what kind of tools/websites can you use to do a search/screen like this?

Apr 01 10:16 AM

[chris_dress:]

Per their latest reports, TLAB is cashflow positive, so they are adding to their cash.


On Mar 31 04:30 PM Alan Young wrote:

> I like the idea, but....
>
> (1) What is your definition of "high cash-burn rate"? I ask because
> at least half of your are big cash-burners by my measure: e.g., TLAB's
> EPS (ttm) -2.34 is a rate that will burn all their reported cash
> in about 8 months.
>
> (2) There must be a reason all these companies are in the telecommunications
> equipment industry, and I'd need to learn more about the industry
> to find out why so many small players (and at least one mid-sized
> one) are hoarding cash like this.
>

Apr 09 01:28 AM

[Jon Smirl:]

I only got a +1 for this tip. Stock is up 340% in two months since I posted. There's still more upside.

On Mar 31 10:58 AM Jon Smirl wrote:

> Intellon (seekingalpha.com/symbo...) - Mkt cap $57M, cash
> $54M

Jun 11 02:44 PM

[The Inflect...:]

Wow, nice going...Not that familiar with the name, other than strong balance sheet...estimates have come up very nicely...will look into...thanks for the headsup, Jon. Best, John


On Jun 11 02:44 PM Jon Smirl wrote:

> I only got a +1 for this tip. Stock is up 340% in two months since
> I posted. There's still more upside.
>
> On Mar 31 10:58 AM Jon Smirl wrote:

Jun 11 03:39 PM

[Jon Smirl:]

Intellon is a real semiconductor company. They make the chips used in powerline modems. If you need an Ethernet jack in a room that isn't wired, get a pair of these. They act like an Ethernet extension cord.

www.newegg.com/Product...
Available from many other vendors like Linksys, Netgear, etc.

Jun 11 09:00 PM