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Microcap Value investing is not getting very much attention these days. Most investors are choosing large cap managers, large cap stocks, or ETF's that track small and mid cap companies rather than uncovering value in the middle markets. The general avoidance of small cap value stocks has created an environment that has left many stocks below book value stocks trading at incredibly cheap valuations. (While completely lacking in net-net stocks, where net current assets are higher than the company's market cap, meaning that if you liquidate the assets shareholders would make money.)

Investors with a penchant for cheap stocks should consider the following ten microcap bargains, even though they are not traditional "Cigar Butt" type investments (companies trading below net current assets minus total liabilities) which in the past have driven strong investment gains for patient and alert value investors. When investing in cheap small caps, it pays to be very cognizant of the risks involved. These mainly arise from agency conflict, greedy, self-serving managements and poor industry fundamentals. Additionally, investing in below book value stocks with a lot of inventory and property and equipment is a bit more risky as these assets are often not worth very much in a liquidation.

That being said, the following ten names appear to be undervalued based on net asset value (assets minus liabilities) as well as earnings and cash flow. These should provide enough of a margin of safety for investors to make money over time. We are looking for fifty cent dollars, and many of these companies appear to fit that bill.

BAMM -- Books-A-Million is in the most hated industry that I can imagine: Brick and mortar book selling. BAMM is a dirt cheap stock trading for just .56X book value and 7X trailing earnings. The company boasts an EV/EBITDA ratio of just 2.84X and a price to sales ratio of just .13X revenues. BAMM has proven that it cares about unlocking shareholder value in the past, as it has issued incredibly large special dividends to its shareholders over the last five years. Investors worrying that this may be a value trap should evaluate the long term track record of management for delivering shareholder value, and not get too caught up in the "business model" concerns which are currently affecting the stock price. BAMM still produces large free cash flows and has plenty of net assets to distribute to shareholders via future dividend payments. In short, BAMM appears to be a bargain.

AWX -- Avalon Holdings is an interesting company that is a combination of two disparate businesses: Waste management and golf. AWX has a dual class share structure and management has seemed reluctant to unlock shareholder value. The stock, however, is a dirt cheap bargain, trading for just 25% of net book value and a low price-to-operating cash flow multiple. If AWX can generate profits from its golf business as well as its waste business, look for the stock to trade for 75% of book value at some point in the future, which is a full 200% climb in AWX shares -- ie. it's too cheap to ignore.

HAST -- Hastings Entertainment is my largest position. The reason for my bullishness in the name is the ridiculous undervaluation of the company's common stock. Shares of HAST are currently fetching just $43MM or so in market cap, while the company maintains net assets of $104MM plus. If you can find a cheaper stock on book value and free cash flow which is profitable, please let me know. Management, which owns 50% of the name, appears to be friendly to all shareholders. Hastings repurchased around 6MM in stock last year while projecting to buy back 6MM in stock in 2011. Hastings is more diversified than Books-A-Million, while the shares are more undervalued on free cash flow and tangible book value. This makes it my top pick for 2011.

OTCPK:TBAC -- Tandy Brands is a Cigar Butt name (i.e. current assets minus total liabilities is greater than the total market capitalization of the stock). In my humble opinion, the company has suffered from mismanagement and severe agency conflict in years past. The question going forward is whether the new CEO, Harvard MBA Rod Mcgeachy, will be able to turn around the business to a large enough degree to reward outside shareholders in the future. TBAC was a personal disappointment for me and for my fund holders. We had to learn the hard way that many times, small cap value stocks carry the risk that company management teams will act unethically or without diligence. With the new leadership in place at the company and the coming permanent departure of the old leadership team, I sincerely hope TBAC can turn around the business and grow the net asset value, which is so vital to the company's success and survival going forward. I am comforted by the fact that Rod's reputation is clearly on the line here and I feel he is an ethical and hard working CEO. The future may be very bright for TBAC, but Mr. Mcgeachy and the board will have to focus more on the bottom line moving forward.

NWLI -- National Western posted a huge Q4 this year. The company grew earnings from around $11 a share over the past couple of years, to over $20 per share this year. You would never know that the company posted phenomenal earnings last year from NWLI's stock price. Shares have languished in the $160 range for some time now, although it is well off the lows of $130 that it reached last summer. NWLI boasts a book value per share of $335 and has not lost money in many years. I believe this stock would meet Ben Graham's criteria for a value investment and I will be looking to add to my position in the coming weeks.

HWG -- This small textile stock sports a big discount to book value. Investors in the name are riding the trend of a net-net stock, (current assets minus total liabilities is greater than the total company market cap) with a rapidly growing net book value. HWG is also cash flow positive and earning money so the discount to book value should likely continue to grow if the stock remains in neutral.

GBR -- New Concept Energy is an interesting net-net play but the company's value is highly dependent on a $10MM loan to a company that is affiliated with GBR's management. Although I normally would be more skeptical of this type of related party arrangement, the company who borrowed the money appears to be a solid player in real estate investment banking from what I can tell. More due diligence is needed, but at current prices GBR could end up being one heck of a value stock for the long haul.

VOXX -- Audiovoxx is a perennial net-net that always seems to earn a tiny bit of money and always remains valued below net current assets. This company is somewhat larger than most net-nets and the company has listed options on the stock. This makes a covered call or short put option play attractive in VOXX shares. If the recent acquisition of Klipsch works for VOXX, the stock could eventually rise to a more reasonable multiple of book value and unlock shareholder value -- ie. the stock could rise significantly and make you money.

AHL -- Aspen Insurance Holdings was beaten up pretty badly by the Japan disaster, but the company is generally quite conservative and can ride out turbulence with the best in the reinsurance industry. The wide discount to a growing book value along with strong earnings and well-heeled management make me a long term bull on the name. This, despite the risks and low rates involved with the reinsurance business.

Disclosure: I am long AWX, HAST, OTCPK:TBAC, GBR, HWG.

Source: 10 Micro Cap Bargains for Further Research