Value investing can be summarized by the saying, "one man's trash is another man's treasure." The phrase rings especially true in the world of microcap value investing. Microcap names often lack liquidity, have little to zero analyst coverage, may be unprofitable, and can carry risk. With that said, many times microcap value stocks are overlooked by Wall Street, and can offer investors significant value over the long term.
These names can zig when other investments zag, which makes the space a good diversifier for investors who prefer larger Blue Chip names or index fund investing. In addition, small cap value investing has outperformed all other long only investing strategies for years. Ibbotson and Associates found that small cap value investing outperformed index investing by 4% per year from 1926 through 1997, which is more than any other category they researched.
Here are 11 investments worth watching and purchasing, in a longer term buy and hold / covered call or calendar spread approach:
John B. Sanfilippo & Son, Inc. (JBSS) is trading for 55% of book value and around 60% of tangible book value (which we view as more reliable) and for 26X trailing earnings. The company sells Fisher nuts, as well as salad dressing, trail mix, dried fruit snacks, sunflower seeds, and other products. John B. Sanfilippo and Sons earned $14MM with another $15MM in depreciation in 2010, and if the company can become profitable over the long term, investors with a long term focus should be able to make money in the stock. If the company can earn as much in 2011 as it did in 2010, the stock is trading for just 7X earnings.
Hastings Entertainment (HAST) sells for 38% of tangible book value and for under 4X 2010 free cash flow of $11MM. Hastings is a diversified retailer which sells DVDs, video games, electronics, digital and physical music, musical instruments, books, coffee and pastries, magazines, toys, consumables and more. The company sells new and used products and the company insiders own more than 55% of the outstanding shares. Combine that with a 10% position by longer term quantitative value shop Dimensional Fund Advisors, and Hastings is a very low float name whose share price exhibits large swings in trading price.
Hastings has repurchased a large amount of stock over the years, and has paid down a significant amount of debt. The company's website is also ranked in the top 10,000 sites, and with e- Books coming in the 3rd quarter along with the site's current digital music offering, Hastings appears well poised for the digital era and the new media revolution.
Books A Million (BAMM) is a bookstore which is very cheap on a price to free cash flow basis, trading for less than 3 times operating cash flows. BAMM is also trading below book value with a price to book of just .61X. The e-Reader has caused a steep selloff in shares, but BAMM has a growing web business of its own and shares appear quite reasonable on all metrics of value. BAMM has rewarded shareholders quite generously in years past, shelling out almost its entire market cap in the form of special dividends over the past five years.
Aircastle (AYR) is a cheap growth name, trading for just 67% of tangible book value with 18% year over year quarterly sales growth. Earnings look impressive and the stock looks cheap at just 10.3X earnings. Commercial jet leasing is a risky business, and with high oil prices many investors are likely nervous that AYR will experience some turbulent quarters ahead. In my view, the pessimism is unwarranted and investors can buy the cash flow stream here for less than the company's aircraft are worth. The margin of safety at AYR is impressive.
Duckwall - Alco Stores (DUCK) is a cheap name in the retail category, trading for around 40% of tangible book value. The company is in turnaround mode, and is free cash flow positive. Some famous value investors such as Michael Price are big holders of the stock, so investors are in good company here for a longer term buy and hold investment in the name. Duckwall recently announced the consolidation of its business, which entails closing unprofitable stores. Hopefully the company's restructuring efforts will pay off for longer term shareholders as the stock is down significantly from its highs a few years ago. The company delivered impressive revenue growth of almost 6% on a quarter over quarter basis and the shares look dirt cheap if the company can fix the headwinds it faces and grow profitable sales in the future.
Vicon Industries (VII) is a Net Net name (current assets minus total liabilities equals a value greater than the company's market cap) which is in the midst of a turnaround. The stock is trading for around 65% of tangible book value and is free cash flow positive. The stock would meet Ben Graham's strict criteria for investment, but investors should watch the name closely and research the company in detail before buying this microcap name.
Hallwood Group (HWG) shares trade in the Net Net category, and are dirt cheap on a free cash flow and book value basis. The company sports a price to tangible book of just .54X and a 3.6 PE ratio. HWG is a name that almost no one has heard of, yet the company has managed to post strong growth figures in the textile industry. Although revenue growth was down 29% last quarter, the stock carries a significant margin of safety at current valuations.
New Concept Energy (GBR) may be one of the cheapest of the cheap, trading for less than one third of tangible book value. The company owns retirement communities and natural gas operations and the business has been able to eek out small profits over the past few quarters. A large loan to a Texas based Real Estate private equity firm has curbed the valuation, but I view the sell off as overdone, as the company has generated over 700K in "owner earnings" over the past 3 quarters while the market cap is just 5.2MM... GBR is a nanocap and not for the faint of heart, but investors with a longer term focus could do well here.
Tandy Brands (TBAC) is a potential turnaround play selling for just 38% of tangible book value. The company has been plagued by operating losses for the past few years, but before losing share the business was generating around 10MM per year of free cash flow on sales of over $200MM per year. With sales of $128MM or so this year, the company still has the potential of returning to glory for shareholders at just a 13MM market cap. One thing is for sure, this company has been a tough stock to own in the recent past, but opportunity arises in stocks that have all of the bad news priced into their shares already.
Audiovoxx (VOXX) shares have languished for the past year, but the company has actually earned some money over this time period, while the stock is trading at a deep discount to net current asset value. Voxx is undervalued, and management is taking steps to drive profitable growth in the future. Many investors argue that VOXX is dead money and that the Klipsch acquisition was a bad move fundamentally for the business. I disagree and think that Audiovoxx is a solid name in its market niche, and that with added synergies the combination of Klipsch and VOXX makes sense. That said, investors have to realize that VOXX has been in Net Net territory for several years now, and the company has yet to find a way to successfully unlock asset value for shareholders. Hopefully, earnings will be the catalyst for the company to trade closer to its net asset value in the near future, and investors scooping up shares at these prices will see a nice gain in PPS.
Alliance One International (AOI) is an international Tobacco sourcing business which essentially pays farmers for their tobacco and resells the product to cigarette makers around the globe. AOI stock is cheap on a book value basis, but at around 80% of tangible book value the stock is not as inexpensive as other names listed here, in my opinion. Additionally, the company has a fairly heavy debt load, but tobacco is a recession proof staple product, and I expect AOI to grow profits and operating cash flows in the future. AOI is the top holding of Aegis Value fund-- a top performing small cap value mutual fund.
Disclosure: I am long JBSS, HAST, TBAC, VOXX, HWG, GBR.