There are many factors one can look at to see if a stock is undervalued and/or poised to move higher. One is options activity as I described here. Another is insider activity as I described here. A third way is getting paid extra income through covered calls while we hold stocks we find value in, as I described here. Finally, another valuation method, which Benjamin Graham popularized, is buying companies trading at two-thirds or less their net current asset value.
This is simply calculated with the current assets of a firm and subtracting out all their liabilities. This is essentially the liquidation value of a firm and many research studies have shown that following this strategy produces market-beating results over the long-term. However, now with the proliferation of vast screening tools and the market more aware of this, it's virtually impossible to find such cheap companies; however, here are some that come close:
1) Tessera Technologies (TSRA) develops, licenses, and delivers miniaturization technologies and products for electronic devices worldwide. The stock has no debt and has over $10.25/share in net cash. With a company that just closed at $11.94, that means the company's valuation is approximately 85% in net cash which is rare to find.
Moreover, valuations are attractive as this company trades under 11x P/E, .9x P/B, and .7x enterprise value/EBITDA. Moreover, with the company generating approximately $100 million in free cash flow (FCF), that means when the cash is taken out, the company trades at 1x P/FCF. The chart looks ugly, but I think this stock is a long-term buy here at its close of $11.94.
2) OmniVision Technologies (OVTI) engages in designing, developing, and marketing semiconductor image-sensor devices worldwide. This company has over $500 million in cash against only $50 million in debt, translating to approximately 50% of the company in net cash. With the company trading at just over a 5.5x P/E, .8x P/S, 1x P/B, and just over 3x enterprise value/FCF, the stock looks cheap. The stock just hit its 52-week low as well, but I think a great long-term buy here at $14.
3) MIPS Technologies (MIPS) provides industry-standard processor architectures and cores for digital home, networking, and mobile applications primarily in the United States, Japan, the Pacific Rim, and Europe. The company has no debt and approximately $2.10/share in net cash, translating to just under 45% of the company as net cash. This stock is pricier at 14.5x P/E, 3.3x P/S, 2.6x P/B, and approximately 7.5x enterprise value/FCF . I'm not as bullish on this stock, but if it drops back to its 52-week low near $4 and closer to 5x enterprise value/FCF, I think this is a buy.
4) ACADIA Pharmaceuticals (ACAD) a biopharmaceutical company, focuses on drug discovery and clinical development of novel treatments for central nervous system disorders. The company has virtually no debt and trades at approximately 70% net cash. The valuations are compelling with the stock trading under 4x P/E, 1.5x enterprise value/EBITDA, and a return on equity near 70%. However, the company has been consistently burning cash, sans the quarter ending December 2010, as it hopes for FDA approval on a number of its drugs. I think with such a solid balance sheet though, the stock is a speculative buy right here just over $1/share.
5) Forest Laboratories (FRX) develops, manufactures, and sells branded forms of ethical drug products. The company has no debt and over $8.5/share in net cash, translating to close to 30% of the company as net cash. This stock looks attractive at under 7.5x P/E, 3.9x enterprise value/EBITDA, and approximately 5.5x enterprise value/FCF. I think this stock is a solid buy here right near its 52-week low under $30.75.
6) Teradyne (TER), together with its subsidiaries, provides automatic test equipment products and services worldwide. The stock has just over $4/share in net cash with little debt, translating to the company being over 35% net cash. The stock looks cheap at under 6.5x P/E, 2.6x enterprise value/EBITDA, and about 2.7x enterprise value/FCF. This stock is a buy at $11/share.
7) Veeco Instruments (VECO) designs, manufactures, and markets equipment to make high brightness light emitting diodes (HB LEDs), solar panels, hard-disk drives, and other devices. The company has virtually no debt and just over $14/share in net cash, translating to almost 60% of the company as net cash. With the big hit the stock took on Friday, it now trades at under 3x P/E, 1.5x enterprise value/EBITDA, and just under 3x enterprise value/FCF. I think this is buy here at $24.40/share.
Sources: Yahoo, SEC filings, company websites,