Low Enterprise Value Stocks: February 2011 Returns

by: Randy Durig

The first two months of 2011 have been good considering the rewarding year end rally we experienced. Utilizing our selection criteria, the simple math aggregate of the holdings in the High Cash Stock Review portfolio are up 8.88% compared to the S&P 500 5.53% gain since the new year.

In the fourth quarter, the High Cash Stock Review was up a strong 20.38% percent compared to the S&P 500’s gains of 9.92%. Please review our update.

Our third quarter 2010 performance was rewarding with 16.68% returns compared to the S&P 500’s 10.62% return. Please review our update.

Enterprise value is simply the value of the ongoing operation, eliminating the cash and or debt from the companies market value. Most private companies for sale that we have reviewed and the few we have purchased, do not include cash and often debt assumptions out of the question. We like low enterprise value because we are paying very little for the operating core of the company.

We seek companies with little to no debt and low or negative enterprise values, meaning that the entire operations are able to be acquired close to nothing. For companies to be trading so low, or at highly distressed values, most opinions about the entire sector or specific company are often quite negative driving value to this low level.

We try to profit form these unique and sometime fearful situations. This takes a very disciplined and well rounded review process, focusing on companies that provide high cash flows, superb business models and increased earnings forecasts. The select few that make the cut are included into our High Cash Stock Review. Below are the equity positions included in this portfolio that had these characteristics when they were published on Seeking Alpha and have been held for the entire period.

The January & February figures added to the second half of 2010 based on simple math are:

Time High Cash Stock Review S&P 500
January & February 2011 8.88% 5.53%
Fourth Quarter 2010 20.38% 9.92%
Third Quarter 16.68% 10.90%
Total 45.94% 26.35%

Fourth Quarter 2010 performance on our Seeking Alpha listed stocks:

Company 2011 Year to Date Fourth Quarter 2010
China Yuchai International Limited (NYSE:CYD) -12.43% 63.14 %
Homeowners Choice, Inc. (HCII) 1.98% * 29.69 %
KHD Humbolt Wedag International AG (OTCPK:KHDHF) 18.89% 22.76 %
LoJack (NASDAQ:LOJN) -7.43% New to the portfolio
O2Micro International Ltd. (NASDAQ:OIIM) 32.36% (- 1.44) %
Openwave (OPWV) 4.72% New to the portfolio
The Bancorp Inc. (NASDAQ:TBBK) -16.62% 44.02 %
Tessera Technologies Inc. (TSRA) -21.40% 19.55 %
Silicon Graphics International Corp (NASDAQ:SGI) 71.76% 11.21 %
Sonus Networks, Inc. (SONS) 13.48% (-27.76) %
Terra Nova Royalty Corporation (NYSEARCA:TTT) 12.42% *14.61 %

*Dividends are not included

With Sonus being the single worst stock in the fourth quarter of 2010, we were eager to review the earnings release. We are not surprised that management provided very solid guidance on the very last day of February, thus our clients being rewarded with over a 30% increase in the first trading day of March 2011.

It appears again the top performers one quarter are often the worst the next as Silicon Graphics was the worst performer last year followed by O2Micro. Since the new year, SGI has been outstanding providing over a 70% return. On a lesser note, OIIM has also performed well. Both China Yuchai and The Bancorp made strong runs last quarter driving the portfolio higher with both the best and second best performing in the fourth quarter of 2010. Now in 2011 both are holding back the performance of the portfolio.

LoJack was up substantially after we published our review, and also in the fourth quarter, but since we report for only companies that we owned for the entire quarter, LoJack appears to be under-preforming similar to others that had strong 4th quarter runs.

We started the High Cash stock portfolio with the understanding that very low enterprise values may provide protection from a market sell off. Positive earning, cash flow providing profit increase, and possible stock price expansion are all examples that assist in raising these very low values.

Updated Portfolio Review:


We added Duoyuan Global Water Inc (DGW) to the portfolio in February and our analysis will be available on here. Even though Duoyuan has a gain in stock value since our initial review we have not included it in performance metrics since it was not included in the portfolio at the start of the period.


We sold Tollgrade (NASDAQ:TLGD) since the February 23, 2011 announcement and our reasoning can be found here. The board of directors have accepted an all cash buyout. Based on this material event we believe that the future upside was limited. Since we have removed it from all our clients’ portfolios, we will not report Tollgrade in the performance. On a side note, we bought and published the recommendation at $6.50 and the announced buy out was for $10.10.