Are These 11 Small 'Cash Rich' Companies a Good Buy?

by: Kurtis Hemmerling

While assets are nice, there is nothing as liquid as cash. A heap of money can be used to start paying out dividends or to reinvest in growth opportunities. Even better is when a company has no debt to accompany the piles of liquid currency.

The following list of stocks all have the same features in common:

  • Debt/Equity of 0.1 or less
  • Long-term Debt/Equity of 0.1 or less
  • Price to Cash less than 1
  • Price to Earnings less than 20

In theory, these companies should have an intrinsic value equivalent or higher than the share price they are trading for. Does this make them undervalued stock picks to immediately buy up? We’ll see.

The "Cash-Rich" Stock List

  1. PennyMac Mortgage (NYSE:PMT)
  2. 1st United Bancorp (FUBC)
  3. Provident Financial (NASDAQ:PROV)
  4. Teche Holding (NYSEMKT:TSH)
  5. China Education Alliance (CEU)
  6. China Mass Media (NYSE:CMM)
  7. Gravity Co. (NASDAQ:GRVY)
  8. North Central Bancshares (NASDAQ:FFFD)
  9. VSB Bancorp (VSBN)
  10. CSP Inc. (NASDAQ:CSPI)
  11. Peerless Systems (NASDAQ:PRLS)

Analyzing Fundamentals

The first feature that should be noted is that all of the above companies have very small market capitalization. The largest is PMT with a cap of just over $300 million down to PRLS which has a total cap of just over $10 million.

Second, every stock has a price to book ratio under 1 which implies that intrinsic value is indeed higher than share price. The highest at 0.99 P/B are PMT and TSH. The lowest are PRLS with a ratio of 0.19, and FFFD at 0.46.

Stocks with the highest EPS growth this year: GRVY 349%, FUBC 219%, FFFD 142%, CSPI 124%, PROV 110%, CEU 46%, and the rest are 5% and under. As with many tiny cap stocks, EPS expectations looking forward have spotty coverage at best. Of the few stocks with five year forecasts, the highest listed are: CEU and PMT, annualized at 25%. It should be noted that PMT is a residential REIT.

Stocks with the highest profit margin: PRLS 76.7%, PMT 55.6%, and CEU 39.7%.

Stocks that pay dividends: PMT 8.92%(REIT), PROV 0.51%, VSBN 2.03%, TSH 3.9%, and FFFD 0.24%.

Story Behind the Stocks

  • Before you run out to buy any of these investments, consider what might be impacting the company. For instance, PRLS bought back all its shares but 3.36 million. This will make fundamentals look quite attractive. The question is will the company continue to bleed over time and has the market already priced this in, or is this truly a bargain play with some upside? The future doesn't look that sunny with PRLS, so let's hope the company doesn't lose any of its precious few clients.
  • Then you have a Florida bank, FUBC. The 1st United Bancorp is a small bank that will need to turn around its negative earning surprises that have been reported in three out of four of the previous quarters. While trading below book values, investors could be reeling in fear from smaller institutions closing as they saw 157 U.S. banks close their doors in 2010, and 14 more in 2011 so far. In fact PROV, TSH, FFFD, PMT and VSBN are all in the financial sector either as a bank, REIT or in the savings and loan industry.
  • China Mass Media Corp (CMM) has seen declining revenues and earnings over the past years, and a new chief financial officer. This one is engaged in a battle with short-sellers claiming "pump and dump" trading schemes that hurt share prices. The lash-back from this was in the form of accusations that China MediaExpress (OTCPK:CCME) created fictional reports that tied the agency to Apple (NASDAQ:AAPL). While the new CFO may be able to turn things around, it seems many have taken the "wait and see" approach.
  • CEU is another China play that appears to have incredible valuations and increasing fundamentals. Before you run out and buy with both hands, read this report by another Seeking Alpha author that balances intrinsic value and growth opportunities with the allegations that the company inflated financial reports.
  • Gravity is a South Korean company creating online games for massive multi-player sessions. This stock has fallen hard from its $13.77 highs in 2005 down to around $2 today. Prices are starting to pop but PE ratios are still high being just under 40. I’m not an online gamer so I feel like a fish out of water on this one. This company's high relative cash position and low price/book value make this a reasonable buy as I can see the company continues to develop games under contract. I only worry about the 25% QoQ decline in subscriptions, although this only makes up less than 15% of the total revenue and was offset by the other increasing revenue streams.
  • CSPI has a decade long trend of increasing revenue. The company plans to repurchase an additional 250,000 shares, which is a big dent out of the 3.54 million outstanding and 2.72 million float. Price to sales are very low with a 0.16 ratio, and the PE is still only just over half of the industry average. While earnings have been erratic, this stock could very well continue its two year upward climb while keeping a deep intrinsic value.

Even though many of these cash rich companies could make a good micro cap speculative stock pick, make sure you look twice before taking the plunge as many skeletons can hide under a heap of cash. (You might also be interested in these nano cap stocks under $5.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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