In any endeavor, it is imperative to recognize any biases or blind spots that may encumber us. My screening process is heavily oriented toward cash flowing companies. It is hard to go wrong with buying strong cash-generating companies at cheap prices. But I recognize that value may exist in other stocks that I may miss due to my strong focus on cash flows.
Thus, I ran a screen focusing on book value. My preference would have been to screen on stocks trading below tangible book value, which backs out goodwill and intangible assets from book equity. Unfortunately, the six or so screening tools at my disposal did not allow for searches on tangible book. I modified my search for cheap P/B stocks as follows:
- ((Cash - Long Term Debt) / Market Cap % >= 100)
- and (Price / Book Ratio: Current <= 1)
- and (Stock Sector not = Financial Services)
- and (Exchange not = OTC)
I screened for cheap stocks based on a maximum price-to-book ratio of 1.0x. I excluded financials, many of which trade below book. To find the cheapest of the cheap, I added another requirement that the stock price be below net cash on the balance sheet. This screen yielded the following names:
- Bonso Electronics International Inc (BNSO)
- Convera Corporation (OTC:CNVR)
- EDCI Holdings, Inc. (OTC:EDCI)
- Heelys, Inc. (HLYS)
- Icagen, Inc. (ICGN)
- Man Sang International (BVI) Ltd (MHJ)
- Optimal Group, Inc. (OPMR)
- PDI Inc (PDII)
- TeamStaff, Inc. (TSTF)
- TravelCenters of America LLC (TA)
I excluded a few stocks due to lack of information in the databases or redundancy (for instance, Atrinsic [ATRN] popped up in a previous screen). While all of these micro-cap stocks have large cash holdings relative to their market value, they share other negative traits. None of them sport a P/E ratio because they all posted net losses. Some companies, like Heely's or EDCI, seem to have deteriorating businesses or market positions.
Many of these names could take us into "cigar butt" / value trap territory. While these companies may have large cash balances, there is no guarantee that management won't waste that money trying to salvage their jobs. Ben Graham's approach was to buy a large number of "cigar butt" stocks (dying companies that have one last puff of value in them) with the expectation that the winners would more than offset the losers as he saw no reliable method of discerning which stocks would pay off.
There may be opportunity in these stocks. Because of their tiny market caps, analyst coverage is scarce and pricing inefficiencies could exist. But this list should only be used as a starting point. In-depth research is required to single out the winners in this bunch.
View the results of this stock screen in spreadsheet format here.
Disclosure: No positions