In difficult, choppy markets, one of the easiest ways to retain your conviction is to buy deep value. There are several different strategies by which one can judge value, but one of the most basic is to compare a companies worth to the amount of net cash on the books. The analysis is appealing because of its simplicity--there is no question of the valuation assigned to cash.
Companies that sport a high ratio of net cash to market cap are usually not without problems, but the high cash levels give these companies a margin for safety to carry out the business improvements that are usually needed to regain profitability. Here are 5 companies that have a high margin to safety:
Cutera (NASDAQ:CUTR) has been sporting a basement valuation for some time, as the aesthetic laser industry suffers from low margins due to overcapacity. However, the industry as a whole has been experiencing consolidation over the past 5 years that is likely to lead to a return to profitability for the sector. With 85% of its current market cap in cash and no debt, CUTR is well positioned to weather the industry's current woes, and the valuation is such that a small uptick in the business climate could lead to big gains for the stock.
Nam Tai (NTE) has also struggled with industry-wide overcapacity and shrinking margins, as the traditional semiconductor industry has suffered at the hands of mobile computing. However, the company recently inked a contract that has the potential to double revenue in 2012. With 77% of the company's market cap in cash, no debt and a 5% yield, the stock offers low risk with the potential for a dramatic revaluation.
Rosetta Stone (NYSE:RST) had a pretty miserable 2011, with headwinds coming from decreasing government budgets as well as consumers trading down to cheaper alternatives. Nevertheless, the company continues to have a best-in-breed product and a sparkling balance sheet with no debt and 72% of its market cap in cash. If you back out the cash from the valuation, an investor is currently paying around $40 million for the intellectual property that is Rosetta Stone. Given its status as a premier education software company in a growth industry, the valuation seems very inexpensive.
There is nothing sexy about KSW (NASDAQ:KSW), a contracting firm that installs HVAC systems in New York City. However, the company is a proven producer, having maintained breakeven results during the financial crisis and returning to profitability despite headwinds in the broader construction sector. With a 4.6% yield, 80% of its market cap in cash, no debt, and an $86 million backlog, the company offers the promise of a steady, market-beating return with low risk.
The pessimism surrounding Amtech (NASDAQ:ASYS) is largely due to its association with the alternative energy sector. Declining government subsidies led to a terrible 2011 for alternative energy, but Amtech remained profitable despite the downturn. With oil prices remaining uncomfortably high, the drive for alternative energy will continue despite the setback due to government austerity. With no debt and 80% of its market cap in cash, Amtech looks poised to survive the downturn. Given the bargain valuation, a small uptick in the climate for alternative energy stocks could provide some big gains for investors.
Disclosure: I am long RST.