8 Small-Caps Still Trading Below Book Value, with Net Cash

by: Alan Brochstein, CFA

Those who follow my work know that I spend way too much time running screens on the weekends. My goal is to find new ideas. I run various types of screens, looking across broad market capitalization ranges or within sectors or even narrow industries. Many of the screens are value-focused, others pursue growth. I tweak my screens, and I try to come up with new ones. The screen I ran today extends upon some screening I was doing at the end of last year within the Consumer Discretionary sector, which was laden with companies trading below tangible book value.

Today, I applied several of those parameters to the broad market and tried to hone in on companies that not only have strong balance sheets but that appear to have weathered the storm. While the 8 names I am about to share are up a lot this year, they were down a lot last year and appear to be cheap yet. Lots of people like to buy value stocks when they are beaten down, but prices 50% higher aren't necessarily bad prices. In the case of this group, they fell pretty much with the market last year, about 47% on average. While they have rallied 57% on average in 2009, they are still down over the past 21 months. While I know only one of these companies very closely, the group certainly appears to be worth investigating.

In order to narrow the universe, this is what I did (and why):

  • Market cap: $100mm to $2bln (my definition of small-cap)
  • YTD Price Return > 0 (eliminate poorly performing stocks)
  • Book Value <1 and TBV < 1.2 (potential downside protection)
  • Forward PE < 25 (profitable and not excessively valued)
  • Net Debt <0 (downside protection)
  • ROE (Trailing 4Q) > 0 (weathered the storm)

Here are the results (click to enlarge):

Small-Cap Stocks Below Book Value

The list is sorted by economic sector, with 6 of the 10 sectors represented. Before sharing some brief thoughts on each one, I wanted to share some general observations. First, while the PE ratios are somewhat elevated vs. the market and relative to their 5-year medians, I believe that the explanation is depressed margins. Note that the P/S ratios are all at a discount to their 5-year medians. Second, I included a measure of BV relative to the 10-year median P/B ratio to see if any of these "always" trade below book value. As you can see, each of the 8 stocks is trading below its long-term median, with most trading substantially lower.

Gulf Island Fabrication (NASDAQ:GIFI) is involved in off-shore platforms, primarily in the Gulf of Mexico but with 1/4 of its business international. Though the company is debt-free, it slashed its dividend 90% earlier this year. Capex has been rather lumpy for the company, though they have cut it sharply this year. I note the backlog is shrinking rapidly. Here is a link to their website.

Kaiser Aluminum (NASDAQ:KALU) has rallied back strongly with the commercial aerospace sector. The company, which came out of bankruptcy in 2006, has evolved from a mining company to a fabricator. Kaiser began paying a dividend in 2007 and has hiked it each year, offering a current yield of 2.6%. While there are 5 institutional holders who owned in excess of 5% as of 6/30, it is worth noting that the union owns 24%. Here is a link to their website.

Griffon Corp (NYSE:GFF) is a holding company with three unrelated businesses, all of which are about the same size in terms of sales. Their Clopay Building Products is a residential garage door manufacturer. Clopay Plastics Products sells specialty plastic into a broad array of markets, including baby diapers and surgical gowns. Telephonics, which is actually growing due to homeland defense and border security, makes radar equipment that is sold globally. The company raised a war-chest with a rights offering last September ($246mm) at 8.50, selling to an affilliate of Goldman Sachs (NYSE:GS), which subsequently reduced its stake rather dramatically to a still substantial 17%. While they certainly enhanced their balance sheet, they doubled their share-count. In a strange governance twist, the CEO, who joined in 2008, is the son-in-law of the Chairman-of-the-Board and had previously served as President for Wynn Resorts (NASDAQ:WYNN). He joined with a golden parachute package that pays $13mm. Seems like the CEO might have been brought in to get this one sold. He also owns 2% of the company. Here is a link to their website.

You are probably familiar with Footlocker (NYSE:FL), the old Woolworths. My son is a big fan of their direct-to-consumer CCS. I am not sure why this one is so inexpensive. The company pays a 5% dividend (though that is about all of FCF), hiking it every year since implementing it in 2002. Shoe-stores have been doing fairly well recently (pent-up demand), especially athletic wear. From what I can tell, investors aren't keen on the heavy mall focus of this company. Here is a link to their website.

Shoe Carnival (NASDAQ:SCVL) has been one of my best investments this year, and I continue to hold it in an account I manage as well as in my Top 20 Model Portfolio (6% position). I have written about the company on several occasions, most recently contrasting it to a peer and before that more in depth. I visited a store near my house recently - not my kind of place at all, but I can see how it appeals to their target market. With large inside ownership and a much improved inventory situation, I like it here. Here is a link to their website.

Specialty Underwriters' Alliance (SUAI) was really cheap. This provider of niche property & casualty insurance was engaged in a proxy battle when another company, Tower Group (NASDAQ:TWGP) entered the fray and acquired them. It looks like they are getting a pretty good deal, so it might be worth checking out. Here is their website.

Mercer Insurance Group (NASDAQ:MIGP) is a more traditional P&C company focused on small and medium-sized businesses in the West and in NY/NJ/PA. Their investment portfolio is very high quality. The company has 19% insider ownership as well as a 10% ESOP stake. Here is a link to their website.

The last company is Comverse (NASDAQ:CMVT), the Israeli software company leveraged to communications. The company hasn't filed with the SEC in quite some time - 2005. Let's just forget about this one!

So, the screen kicked out several names, some of which aren't really investable. I know and like SCVL. A few others look interesting. In any event, screening is always a step and not a conclusion, so treat these as ideas and not recommendations.

Disclosure: Long SCVL in a portfolio I manage