Using tangible book value per share as a primary criterion to evaluate potentially undervalued equities has yielded many interesting results in the last few months. Many of these results were in the financial sector, probably due to widespread skepticism regarding the accuracy and reliability of financial institutions' books after the financial crisis of 2008 and its aftermath. Whether this skepticism is merited is another issue; recently, though, I decided to take a look at what would happen if I excluded financials from my screen.
I screened for actively traded equities on U.S. exchanges of companies headquartered in the United States, minus the financial sector. Analytic criteria for this screen included the following:
- Current price to tangible book value per share ratio < 1
- 30 day average volume > 100,000 shares
- Percent change in insider holdings between 90% and 100% of peer group (percentile)
- Percentage of insider shares outstanding between 50% and 100% of peer group (percentile)
This screen yielded three very interesting microcap companies, which may be worth a closer look by risk-tolerant value investors.
1) Green Plains Renewable Energy (GPRE): This renewable energy firm owns and operates ethanol manufacturing plants in Iowa, Missouri, Nebraska, and Tennessee. In addition to manufacturing ethanol, it also markets and distributes fuel grade ethanol, livestock feed, and industrial grade corn oil. P/E ratio is 38.82, with trailing twelve months EPS at $0.11. Headquartered in Omaha, the firm has some very interesting results when it comes to its financial metrics. For instance, tangible book value per share is $14.22, while shares are currently trading at $4.32. Average daily volume for GPRE shares over the last 30 days is at 349,680 shares/day, providing investors a decent degree of liquidity for a microcap. While the price to tangible book value per share ratio of 0.30 itself signifies potential undervaluation, however, the insider trading activity in GPRE signals management is optimistic about the prospects of this firm. The percentage of insider shares outstanding is at 7.71%, demonstrating a 14.77% increase from the previous filing. In February 2012, shares of GPRE were trading near $12 levels; today, it may be well worth it for investors to pick some up at the $4-$5 range. Market capitalization of the firm is at $126.63 million.
2) Oplink Communications Inc (OPLK): This communications equipment firm deals in fiber optic components and integrated optical modules from design to supply chain. It markets its products to communication equipment suppliers around the world, and it is headquartered in Fremont, California with 3,570 employees. P/E ratio is 33.33, with trailing twelve months EPS at $0.39 and increasing forward estimates for EPS at $0.50. The financial metrics here also signal a buy from my perspective: tangible book value per share is at $14.70, while shares are currently trading at $13. This represents a price to tangible book value ratio of 0.88. Average daily volume for OPLK shares over the last 30 days is at 132,780 shares/day, which is less liquidity than the above case but still a decent level for the retail or individual investor. Like its fellow American microcap firm above, Oplink has a comforting level of insider ownership: 5.32% is the percentage of insider shares outstanding, which represents a 61.63% jump from previous period. With a market capitalization at $248.21 million, OPLK may be a great buy as well. However, be sure to do due diligence before jumping in here: at the end of January of this year, shares were in the $19-$20 range before dropping over the course of the year to today's $13.00 levels.
3) Theragenics Corporation (TGX): This Georgia-based 500-employee firm manufactures and sells implantable radiation devices that treat early stage prostate cancer. Its primary product is TheraSeed, which is based on the radioactive isotope palladium 103. Beta versus SPX is 0.32; 12-month total return on share has been a respectable 5.78%. P/E ratio is 16.64, with forward (December 2012) estimated P/E of 14.08. TTM EPS stands at $0.11, with estimated forward EPS of $0.13. Here, too, the financial metrics outperform: though Theragenics is a smaller microcap with market capitalization at only $63.07 million, its shares trade at a price level in the $1.80 range. At the same time, tangible book value per share stands at $1.96, representing a P/TBV/share ratio of 0.93. Average daily volume for liquidity purposes is at 128,130 over the last 30 days, which may be a concern for large potential investors since shares are in the below-$2 range. However, the percentage of insider shares outstanding is at 6.51%, with a 45.88% positive change from the last period measured. All of these are good signs here.
Of course, before diving into one of these investments, individuals should be fully aware of the risks investing in microcaps involves. These equities can often be much more volatile than the broader market, so for more risk-conscious investors, looking to different ETF options to increase exposure to the microcap sector may be a good idea. Moreover, downside risk in any of these could stem from management ineptitude or inability to access large resource pools, global macroeconomic deterioration, and/or general capital flight from equities. Still, for the value investor willing to tolerate some degree of risk and place some capital in a potentially speculative place for a bit of time, these three equities may be a great place to start. Good luck.