Smallcaps Flush with Cash

by: John Henderson

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 7th 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™.