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The world of below net current asset investing is always filled with questionable business models, asleep at the wheel managements, unethical corporate officers and directors, and many times substantial value and share appreciation potential waiting to be unlocked. Net Net land investing is a drama between fear and greed mixed with Agency Conflict and corporate missteps. That said, buying cigar butt stocks by the basket is a time honored strategy which can yield strong returns if focused and disciplined investors stay diversified and watch out for the bear traps and pifalls of below book value investing.

With the major names in the hottest sectors hitting 52 week highs, momentum investing seems to be all the rage these days -- meanwhile, value investing looks to be about as popular as VHS movie rentals right now. This hyper-focused search for yield and growth has left many deep value bargains out of the current rally altogether, so the Net Net approach to investing (buying companies that trade for less then their net current assets, or current assets minus total liabilities) should be a profitable way to make money over the next year if one can stay diversified and unbiased.

The following analysis on 10 "cigar butt" equities should be seen merely as a starting place for finding value in the stock market and not a "buy list." Sure these stocks are cheap, but many of them are cheap for a reason, and the SEC is likely too busy watching Charlie's "Godesses" to prosecute any immoral management teams at some of the more obvious frauds out there in Nano Cap land. That said, the cigar butt strategy is timeless and can produce solid absolute returns for the patient value investor who buys them by the basket and can tune out the financial media and daily market gyrations while remaining patiently invested through thick and thin.

HWG -- Book Value (tangible) of $66MM with a $41MM market cap. I normally don't like investing in Textiles, but the growth in book value over the past few years is compelling here. The Dallas based company boasts a PE in the 2's with an EV/EBITDA of just .97X.

FMD -- First Marblehead was trading in the mid $40's just a few years ago but today finds price discovery around $2.28. It would appear that William Berkeley is the big loser on this one holding nearly 4MM shares of the stock. Although I once sued Mr. Berkeley over his take-under of NAHC (National Atlantic) I believe him to be an astute investor and that FMD could emerge from it's dead money coma after the mortgage fiasco clipped 2/3 of FMD's book value from the shareholders. Current price to book of about .72 makes FMD an investment to watch.

MEAD -- Mead was a large player in the telescope business but could never quite seem to do the right thing and liquidate the business to pay back underwater shareholders. Today, the slow cash burn makes MEAD risky, but at 50% or so of tangible book value, MEAD may be purchased as a small position in case they do indeed "decide to liquidate before going bankrupt."

HQS -- This growing Chinese company is likely lumped in with the CCME's and FUQI's of the world, although it sells most of its shrimp and seafood products in the U.S., England, and Canada. HQS is also based in the US with most of it's operations located in China. With a price to book value of .55 and a forward PE ratio of just 3.72, the company appears to be a good bargain barring any unforeseen fraud or other risks.

CRC -- Chromcraft Revington is a perennial cash burn situation, but their new CEO has slowed the leaks in this ship and a 63% discount to book value means that this company is worth keeping an eye on -- in 2008 CRC could be purchased for just fifty cents per share. Today, at $2 any pickup in the core furniture business could see the stock double, which would represent a .78X book value multiple.

SYMS -- This cheap Michael Price and Kahn Brothers holding is trading for just 55% of book value, although steep losses should be watched closely.

IESC -- Another money loser that looks cheap based on a slowly declining book value, Integrated Electric has likely seen business slow as the construction industry has failed to pick back up after the housing collapse. Look to pick up shares close to $4 and to unload them anywhere near $5 per share as the company has yet to prove that it can stem losses and grow the bottom line.

TGAL-- This Nano Tech company appears cheap at 60% of book value and has managed to stem the cash burn tide to some degree as it has been net profitable over the last two quarters after several years of annual losses.

TAIT -- Taitron Components is a cheap company trading for less than half of their net book value. CEO Stewart Wang is a Pepperdine MBA and seems to be slowly selling off the inventory on the books (most of their asset value is in inventory, which is normally a sign of risk) and raising cash. With a market cap of $8.5MM, a friendly and qualified CEO, and a tangible book value of over $19MM; investors may be purchasing a fifty cent dollar in Taitron Components. Noesis Capital owns 15% of the company and has a respected long term track record for finding global small cap growth and value investments.

GBR -- This company owns oil and gas wells as well as Senior Assisted living facilities and is trading for under half book value (book value which has been rapidly increasing). I like this stock very much as higher oil prices will increase the value of the companies reserves and future cash flow streams.

All in all, a safe way to play Cigar Butt stocks is just as Graham recommended way back in the 1930's and 40's: Buy at least 15-30 (50 preferably) of them and sell them once you have achieved a 50% gain. If you own them for over 2 years and the value has not gone up per share, simply sell the stock. As Buffett says, these stocks may have a few puffs left in them, so keep an eye on them for potential catalysts that will unlock intrinsic value and reward shareholders.

Source: Bargain Micro Caps: 10 Cigar Butt Stocks Worth a Look

Additional disclosure: I may take a position in a basket of these stocks over the next few weeks