Low Enterprise Value Stocks: Surprising Returns

by: Randy Durig

After reading Jae Jun’s article ”Negative Enterprise Value Stocks: Surprising returns” on Seeking Alpha, we felt his returns were so shockingly good that low or negative enterprise value could be a valuable addition to our selection criteria. We started a new portfolio based on very low or negative enterprise values while still including our established criteria of strong increases in cash flow, earning, and a selective review ensuring it’s a good business model.

We're calling it the High Cash Stock Review. Our goals are to select, purchase, and continually monitor companies in an effort to obtain outstanding performing investments while minimizing risk by finding low values for our clients, doing it all on a very low-cost basis.

The second half of 2010 so far has been very rewarding, with our average stock performance for October and November up 9.78%, compared to the S&P 500 of 3.34 percent.

Our Third Quarter 2010 performance was 16.68% compared to the S & P 500 of 10.62%, as noted in our review update.

The second half of 2010, based on simple math, is:

Time High Cash Stock Review. S& P 500
Oct + Nov 9.78 % 3.34 %
Third Quarter 16.68 % 10.90%
Total 26.46 % 14.24 %

October and November performance on our Seeking Alpha listed stocks:

Company October + November Returns
China Yuchai International Limited (NYSE:CYD) 31.78%
Homeowners Choice, Inc. (HCII) 27.69%
KHD Humbolt Wedag International AG (OTCPK:KHDHF) (-1.26)%*
O2Micro International Ltd. (NASDAQ:OIIM) 1.47 %
The Bancorp Inc. (NASDAQ:TBBK) 28.55 %
Tollgrade Communications Inc. (NASDAQ:TLGD) 16.78 %
Tessera Technologies Inc. (NASDAQ:TSRA) 7.62 %
Silicon Graphics International Corp (NASDAQ:SGI) (-0.09) %
Sonus Networks, Inc. (NASDAQ:SONS) (-23.94) %
Terra Nova Royalty Corporation (NYSEARCA:TTT) 10.05 %

*Dividends not included

We are the first to admit that five months is certainly a short indicator of performance, and we are probably getting ahead of ourselves. With the very low values providing protection from a market sell-off, positive earning, cash flow-providing profit increase, possible stock price expansion helping to increase the often very low values, and -- above all -- a stock exit strategy, we believe this approach is uniquely special. So far, it has done exceedingly well and is beyond our forecast by such a wide margin that we are very excited to help others.

Updated portfolio review:

Homeowners Choice and Terra Nova Royalty Corporation initiated dividend payouts this quarter, giving some of its large cash holdings back to shareholders in the form of dividends; those new yields are above the S&P average. This is a nice and often overlooked additional benefit to the portfolio.

DivX (DIVX) accepted a buyout at a lofty premium for our clients. Upon an in-depth review of the acquiring company, the combined new firm did not meet our criteria and we closed out the position.

KHD Humbolt Wedag International AG spun itself into two companies: Terra Nova Royalty Corporation (TTT) and KHD Humbolt Wedag International AG (OTCPK:KHDHF). This spin-off was designed to unlock hidden value and allow each company to focus on its core operations.

We exited two companies based on their failure to meet out stringent criteria.

Disclosure: Both Durig Capital and its clients have positions in all the above positions except DivX. * The returns were based on equally weighted High Cash Stock Reviews recommendations, that we published and invested into our clients' portfolios, that were held for the entire time period.

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