5 Inexpensive Small-Cap Stocks

by: Ulfberht Capital

We were looking at some attractively priced small-cap stocks yesterday and decided to share a few of these small-cap ideas with readers. When we look at small caps, we look for companies trading at cheap valuations that have a stable business and a solid balance sheet. We avoid small caps trading below a $1/share or below a market cap of $100 million. In our opinion, shares below this threshold tend to be too illiquid, too volatile, and generally not worth the risk. If this post reaches a wide enough audience, we may continue to cover the small-cap space in future articles.

Stewart Information Services Corp (STC)

STC is a real estate transaction management and real estate information services company. STC is primarily in the title insurance business with offices/agents in the United States as well as the U.K., Europe, Mexico, Canada, Central America, and Australia. Title insurance is required by lenders before a loan is made on a piece of real estate. Title insurance protects the lender and the new property owner if some unexpected lien (that is not found during the title examination process) is found after the deal has closed. Using title insurance, the lender is assured primary lien position on the property. Also, the new property owner is protected if the property is found to have title problems due to issues such as, title defects, unrecorded liens, forgeries, and mortgage fraud.

STC has a market cap of $576 million with a net cash position of $172 million. STC's cash position is nearly 30% of its market capitalization. With a TTM PE ratio of 5.35 and a forward (2014) PE of 9.2, we believe that STC shares are cheap. Also, STC has a price-to-book ratio of 0.95 and is trading at about 5.5 times free cash flow.

We like STC as a play on the recovering United States housing market. As the housing market improves, STC will prosper because the service it provides is critical to all real estate transactions. Shares have risen over 80% during the last year and we believe that STC has more upside potential going forward.

Basset Furniture Industries (BSET)

Basset is a retailer, manufacturer, and importer of home furnishings in the United States. Sales channels include 53 company owned retail stores, 33 licensee owned stores, as well as other independent furniture retailers. Basset has a market cap of $150 million and a net cash position of $44 million, which is about 29% of Basset's market capitalization. We believe that Basset shares are cheap with a TTM PE ratio of 5.39 and a price-to-book ratio of 0.98. Shares are up over 60% in the last year and we believe that Basset will experience more gains as this year progresses.

Much like STC, Basset is a good way to play the recovery in the United States housing market. When people buy a new home they will often buy new home furnishings. Sometimes even someone selling a home will buy new furniture to spruce things up in hopes of attracting a buyer. In any case, more residential real estate transactions should bode well for a home furnishings retailer like Basset.

Skullcandy Inc (SKUL)

Skullcandy is a designer, distributor, and marketer of audio headphones and various accessories. Skullcandy has a market cap of $143 million with a net cash position of $34 million, which is almost 24% of Skullcandy's market capitalization. With a TTM PE ratio of 8.15 and a forward (2014) PE ratio of 12.9, we see Skullcandy shares as being undervalued. Skullcandy is selling for book value and has an Enterprise Value/EBITDA ratio of just 2.84.

Our interest in Skullcandy is primarily focused on Skullcandy's apparent plan to buy back up to $28 million in shares. With a fairly high short interest (22% of float), we believe that if Skullcandy is aggressive with its share buy back program it may cause a short squeeze. A short squeeze would be great for Skullcandy shares, in the short term, making the shares a nice short-term trade candidate. Also, we like that Skullcandy is a small company with attractive assets selling at a compelling valuation. These situations sometimes lead to a company being acquired by a larger competitor or by a private equity firm. With the catalysts of a possible short squeeze or a possible buy out, we believe that the market has overlooked Skullcandy and has not priced in these possibilities into the stock price. In our best-case scenario, we forecast that Skullcandy shares will rise 50% or more if there is a short squeeze or buy out. In our worst-case scenario, we forecast that Skullcandy will have a stable business that will maintain a relatively stable share price. We see this as a heads we win, tails we do not lose much type of investment.

Kulicke and Soffa Industries (KLIC)

Kulicke and Soffa is in the semiconductor equipment business where it designs, manufactures, and markets equipment and consumables used to make semiconductor devices. In our opinion, Kulicke and Soffa has a strong business that is selling at a very low valuation. With a net cash position of $499 million (58% of market cap) compared to a market capitalization of $856 million, Kulicke and Soffa has a very strong balance sheet. Kulicke and Soffa has low valuation ratios such as a price to free cash flow ratio of 4.70, a TTM PE of 5.91, and a forward (2014) PE ratio of 7.86. Also, Kulicke and Soffa has a low PEG ratio of 1.07 and a low Enterprise Value/ EBITDA ratio of just 1.98.

Our investment thesis for Kulicke and Soffa is that its business seems to be in good shape and the shares are very cheap. With a stable business and a large cash horde, Kulicke and Soffa is in a strong financial position. This strong financial position gives the company many options to provide shareholder value such as paying a special dividend, repurchasing shares, or growing the business through an acquisition. At the present low valuation, we see nothing but upside from here as the market realizes that Kulicke and Soffa is a good value.

LeapFrog Enterprises Inc (LF)

LeapFrog distributes, designs, and markets electronic learning games for children. In our opinion, LeapFrog has a solid, growing business that is under appreciated by the investment community. With a market cap of $581 million and a net cash position of $190 million, LeapFrog has a very strong balance sheet. We believe that LeapFrog will use these resources to grow its international business as well as acquire other related businesses, when opportunities arise. In our view, shares are very inexpensive selling at 7.3 times free cash flow, 6.46 times TTM earnings, and 11.4 times projected 2014 earnings. In addition, LeapFrog has a PEG ratio of 0.64 and has an Enterprise Value/EBITDA ratio of 4.90.

Our main interest in LeapFrog is that its business is selling at a very cheap valuation. This is surprising for a debt-free company that is growing revenues and earnings at a reasonable rate. We believe that the markets will eventually realize the true value of LeapFrog's business and its shares should rise significantly as a result. Also, we believe that LeapFrog is an attractive buy-out candidate for larger toy companies or by private equity firms.

Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.