A company’s Balance Sheet is the most important thing to focus on when investing in low priced stocks, especially ones under $3. The reason is stocks under $3 have a much greater risk of bankruptcy so you only want to invest in companies with rock solid balance sheets.
Low priced stocks with strong balance sheets with lots of cash and little or no debt can give companies a huge cushion and time to ride out the current recession, or acquire a competitor on the cheap. Cash rich companies with zero debt can provide a tremendous risk to reward to investors since many of these stocks can double and triple in a recovery, yet are so undervalued that almost all of the bad news has already been priced into the stock.
Here are three stocks with cash rich balance sheets and zero debt under $3.
The footwear company that specializes in wheeled sneakers has seen its share price crumble from almost $14 in late 2007 to $1.89 due to consumer stinginess during this current recession.
Yet Heelys has one of the best balance sheets of any retail stock trading today. The company sports $2.49 in cash per share coupled with zero debt. This puts the company’s cash per share at more than 32% above its current stock price. Also Heelys has further strengthened its balance sheet by drastically trimming its inventories and reducing its cash burn to $2 mn for the entire year of 2008. So even if the company burns through the same amount of cash as it did last year, the stock would still be selling at a 24% discount to its cash per share value of $2.49.
Heelys' balance sheet and product line is so valuable that it has already been the target of a takeover bid, from Skechers USA (SKX), the casual footwear company. Skechers tried to buy Heelys twice last year, finally raising its bid to $5.10 a share (that’s more than 170% above the current share price), but the deal never went through.
Therefore, I wouldn’t be surprised if Skechers or another company buys Heelys and with its strong balance sheet and minimal cash burn investors can sleep at night knowing that the company has enough cash to stay in business for the long term regardless of economic conditions.
Natuzzi S.p.A (NTZ)
If you are optimistic about a recovery in the housing market then Natuzzi is the stock for you. Natuzzi is one of the world’s largest makers of leather upholstered furniture. It sells its armchairs, recliners, sectionals and sofas throughout North America and Europe.
Obviously, the stock price over the last couple of years has been correlated to the decline in the housing market and has declined to $1.30 per share - down from $9 at the beginning of 2007.
Yet throughout the downturn, Natuzzi has maintained a solid balance sheet with $62.3 million in cash and equivalents or $1.29 in cash per share with zero debt. This compares favorably to the company’s current market of $71 million and current share price of $1.30.
Even better, the company is profitable. Natuzzi reported a gross profit of $248 million dollars, a 7.7% increase over the previous year - an incredible economic feat such turbulent economic times. Amazingly, the company even increased its gross margins in the fourth quarter of 2008 to 32% from 24.4% the year before.
Also, Natuzzi is headquartered in Italy and therefore benefits from the weaker dollar as all of its financial transactions are done in Euros. Therefore, the company’s cash flow and profits will be even more pronounced if the dollar continues to decline.
The CEO of Natuzzi, Pasquale Natuzzi, combined with his family, owns more than 50% of the stock, and was optimistic in the company’s last conference call, stating that the company is confident that it can reach its three year goal of generating $1 billion in revenue on 15% operating margins. This would give the company an incredibly cheap forward valuation of less than .10 price to sales and less than 1 times cash flow on $150 million in projected cash flow.
If you have downloaded music or video on the internet you have probably used Real Network’s Real Player to stream content. RealNetworks also makes Rhapsody, an online music service that allows users to download or stream music from its library for free with certain restrictions.
RealNetworks is currently in litigation with Hollywood over another product the company is trying to promote which will allow consumers to copy their DVDs to their own computer hard drive. If Real Networks can prevail in this litigation the company would have a huge hit on their hands, and would have another product to add to its software line.
Even without the new DVD software, RealNetworks still generated $604 million in revenue last year, which is almost double its current market cap. Even better, the company has a pristine balance sheet with $370 million in cash or $2.75 in cash per share. This is substantially higher than the company’s current share price of $2.40. Moreover, the company has zero debt.
The reason RealNetworks has seen its share price drop from $7.61 in June of 2008 to $2.40 is the company has been burning cash at a rapid rate. Last year the company burned through more than $29 million in cash, including $8.2 million in the last quarter of 2008. Yet in context this cash burn doesn’t seem that bad since the company has a negative enterprise value (market cap plus debt minus total cash and equivalents) of negative $48 million, meaning the company would still have $20 million more in cash than its market cap even if the company burned the same amount of cash as it did in 2008.
With such a cash rich balance sheet and zero debt and $2.75 cash per share, patient investors can wait out the company’s recovery and pending litigation for any recovery or settlement in the future.