Imagine a company that did nothing. Not because the company or its management were especially incompetent, or lazy, or anything like that -- but simply because the company did not own an operating business.
In the course of my stock screens today, I came across Cadus (OTC:KDUS). It is listed as a biotech company, but it has no business, no revenues, and no real employees to speak of. There is only a CEO who makes $25,000 annually and a board of directors who (taken all together) make about $28,000 annually. These guys are looking for a company for Cadus to buy with its cash hoard, in order to take advantage of NOL's that the company still has on the books. These net operating loss carry-forwards can be used to shield future earnings from taxes, but since 2009 they have been expiring and will continue to roll off the books in the coming years.
Did I mention that Carl Icahn owns about 40% of the stock? This is both the good news and the bad news. It's never a bad thing to coat-tail a more experienced and wealthier investor. On the other hand, if you own Cadus, you will need to wait for Icahn to make a move and he may wait a few more years before he approves an acquisition or liquidation.
The risk-reward attributes of this investment are especially attractive. In its last quarterly report (ended September 2011), Cadus had $23,516,415 in cash on the books, $82,516 in current liabilities, and no long-term debt. That works out to about $1.78 per share in net cash if you were able to liquidate the company today and pay out the shareholders. What makes Cadus so interesting is that it currently trades for $1.35 per share. If you buy at the current price and the company gets liquidated immediately, you will make 31.85% on your investment. If the company makes a smart acquisition and begins to be valued based on an earnings stream, you could easily double or triple your investment.
So what are the risks? Cadus is currently burning about $350,000 a year, or about $0.03/share. At that rate, the company will have $1.35 in net cash on the books in 14 years, so an investor who buys in now at $1.35 has a significant margin of safety. The biggest risk is probably one of opportunity cost and illiquidity. Once you have put on your position, it may be difficult to exit until a catalyst occurs. While you are waiting, you may miss out on other great investment opportunities. It's best to think of an investment in Cadus along the lines of a venture capital or private equity investment-- you put on a position, and check back once a year.
At the Hedge Fund Trading Academy, I encourage my members to simultaneously employ a number of investment strategies or "buckets" that include value, momentum, volatility, risk arbitrage, carry, as well as many other market anomalies that hedge funds regularly exploit. Cadus is an excellent candidate for the "net-net" bucket. Even better, you won't have any competition from hedge funds since the market cap is so tiny.
If after doing your own research you do decide to buy the stock, please be careful. Use limit orders only and be patient, since the stock trades by appointment only -- and very rarely at that.
I do not own the stock simply because I have found it impossible to put on a large enough position to move the dial. But for individual investors with smaller accounts, who don't mind watching paint dry, Cadus is the real deal.