Company Update: Blair
Ticker: BL
Price: 35.00
Up 37 percent since initial report (2/14/03)
Shares of Blair Corp, a small mail order apparel company are up 37 percent since our initial report on 2/14/03. Just like the other companies we initially profiled on this site, the company no longer trades below its net current asset value. Nonetheless, the company still boasts a rock-solid balance sheet, with $35 million in cash (or about $4.50 per share), and no long-term debt.
While third quarter sales ($107.1 million) were down 14 percent from the same period last year ($124.1 million), net income was up significantly, from $793 thousand to $2.9 million. The company has been successful in cutting costs, boosting margins, and garnering more revenue from the e-commerce side of its business.
The company also continues to pay a $.15 quarterly dividend, and yields 1.68 percent. Blair is the epitome of a successful NCAV company: Solid balance sheet, unrecognized value in the marketplace, and profitable. Patient investors have been rewarded nicely.
OUR NEXT REPORT
Stay tuned for a new report which will reveal a profitable regional retailer which is currently trading below its net current asset value. Please send feedback and questions to:
cheapstocks@earthlink.net
Tuesday, November 30, 2004
Wednesday, November 03, 2004
Company Update
Ambassadors International
Up: 46 percent
Last report: 2/22/03
Price: $12.46
Shares of this tiny travel services company have performed well since our initial report (see archive). At the time, the company was trading below it's net current asset value, but with its subsequent run-up, it no longer does. That doesen't mean, however, that there is no value here.
Although trading at a high price earnings multiple (around 70), the company boasts a strong, cash-rich balance sheet. With $97 million in cash and marketable securities, (that equates to $10 per share!), the company has no debt. Third quarter 2004 sales rose to $4.5 million, or $.07 per share, up sharply from the same quarter last year ($3.0 million, breakeven). The company also pays a $.10 quarterly dividend, and currently yields more than 3 percent. Watch as this story unfolds. Essentially, if you purchase this stock at $12.46, you are theoretically buying $10 in cash, a 3% yield, and getting the operating businesses for $2.46.
Ambassadors International
Up: 46 percent
Last report: 2/22/03
Price: $12.46
Shares of this tiny travel services company have performed well since our initial report (see archive). At the time, the company was trading below it's net current asset value, but with its subsequent run-up, it no longer does. That doesen't mean, however, that there is no value here.
Although trading at a high price earnings multiple (around 70), the company boasts a strong, cash-rich balance sheet. With $97 million in cash and marketable securities, (that equates to $10 per share!), the company has no debt. Third quarter 2004 sales rose to $4.5 million, or $.07 per share, up sharply from the same quarter last year ($3.0 million, breakeven). The company also pays a $.10 quarterly dividend, and currently yields more than 3 percent. Watch as this story unfolds. Essentially, if you purchase this stock at $12.46, you are theoretically buying $10 in cash, a 3% yield, and getting the operating businesses for $2.46.
Saturday, October 16, 2004
Company Update
Circuit City
Ticker: CC
Current Price: 11.87
Up 159 percent
Since our initial report on this company (2/8/02), Circuit City shares are up 159 percent. Consequently, the stock no longer trades below it's net current asset value. As an NCAV investor, that's what you hope for. A rising stock price, once the market catches on to the true value of an NCAV company, lifting the company above it's NCAV.
Circuit City still looks healthy. The company's balance sheet boasts nearly $5 per share in cash, with little debt to speak of. Still the retail electronics market remains highly competitive. The company sold off it's credit card operation in January 2004 (deal completed in May 2004) for $1.8 billion, allowing it to concentrate on the core business.
Second quarter sales were up $190 million to $2.345 billion from the same quarter last year, resulting in earnings of 2 cents per share, up from last years loss of 15 cents. They key quarter for this company is the fourth quarter, ending in February. That's high season for retailers, make or break time.
Keep an eye on this company. As an NCAV investor, the objective is to identify companies offering tremendous value at a given price. If the market finally recognizes value in that company, lifting the share price, you need to re-evaluate. In order to protect your profits, consider instituting a stop loss on your shares. As the stock price rises, you can increase the stop loss price. This will help you protect your downside in the event of severe price decreases.
Circuit City
Ticker: CC
Current Price: 11.87
Up 159 percent
Since our initial report on this company (2/8/02), Circuit City shares are up 159 percent. Consequently, the stock no longer trades below it's net current asset value. As an NCAV investor, that's what you hope for. A rising stock price, once the market catches on to the true value of an NCAV company, lifting the company above it's NCAV.
Circuit City still looks healthy. The company's balance sheet boasts nearly $5 per share in cash, with little debt to speak of. Still the retail electronics market remains highly competitive. The company sold off it's credit card operation in January 2004 (deal completed in May 2004) for $1.8 billion, allowing it to concentrate on the core business.
Second quarter sales were up $190 million to $2.345 billion from the same quarter last year, resulting in earnings of 2 cents per share, up from last years loss of 15 cents. They key quarter for this company is the fourth quarter, ending in February. That's high season for retailers, make or break time.
Keep an eye on this company. As an NCAV investor, the objective is to identify companies offering tremendous value at a given price. If the market finally recognizes value in that company, lifting the share price, you need to re-evaluate. In order to protect your profits, consider instituting a stop loss on your shares. As the stock price rises, you can increase the stop loss price. This will help you protect your downside in the event of severe price decreases.
Tuesday, October 12, 2004
I'm back! This website has languished the past year and a half, but now it's back to business. What business? The business of identifying potentially undervalued stocks the Ben Graham way, or, the old fashioned way, you might say. In the coming weeks, I'll revisit the 3 companies Circuit City, Blair, and Ambassadors International, each of which was the subject of a research report posted on this site. We'll review how these stocks have performed since I conducted the initial research, as well as provide updates on the companies.
You can also expect to see new research reports: companies you may have never heard of that may represent tremendous value. To read more about the Ben Graham Net Current Asset Value approach to investing, please scroll down and read the very first posting on this site. In the meantime please e-mail me at cheapstocks@earthlink.net with any questions or comments.
You can also expect to see new research reports: companies you may have never heard of that may represent tremendous value. To read more about the Ben Graham Net Current Asset Value approach to investing, please scroll down and read the very first posting on this site. In the meantime please e-mail me at cheapstocks@earthlink.net with any questions or comments.
Saturday, February 22, 2003
COMPANY REPORT: 2/22/03
Fundamental data is of 12/31/02
Ambassadors International
Ticker: AMIE
Exchange: NASDAQ
Price: $8.62(2/21close)
Market Cap: 85(millions)
PE Ratio: 30
Shares Outstanding: 9.9 (million)
2002 sales: $14.7 (million)
Net Income: $1.6 (million)
Book Value per share: $10.16
Website: www.ambassadors.com
THE COMPANY
Ambassadors Intl. is another company you have probably never heard of, although you are probably familiar with the company's Chairmen (and 14% owner): None other than Peter Ueberroth, former Commissioner of Major League Baseball. The company is best described as a travel services compnay, that also markets and runs uncentive programs. In March, 2002, the company spun-off its educational travel segment, Ambassadors Group, which now trades separately on NASDAQ.
RECENT NEWS/PERFORMANCE
The company recently reported 2002 earnings of $ 1.57 million on sales of $14.7 million, for a decent profit margin, although, $2.5 million was non-operating income. There is not a lot of news on this company, and its average daily trading volume is just 30000 shares. The real story here is the balance sheet, as you will see later.
POTENTIAL CATALYSTS
Improving economy
The market discovering this company's asset story
An uptick in the company;s operating businesses
THE NCAV STORY (data as of 12/31/02)
Current Assets: 113(million)
Current Liabilities: 11
LT Debt: .0
Other LT Liabilities: 0
NCAV: 102
MKT Cap: 85
NCAV/MKT cap: 1.2 (ratio of NCAV to Mkt cap)
NCAV STORY
The story here, is cash and short-term investments, the current amount of which is $107 million. or nearly $11 per share. There is a minimal amount of accounts receivable, and no inventory to speak of. If you buy this stock at the current price of $8.62 (be careful of bid/ask spreads, this company averages just 30000 shares per day), you are theoretically buying $10.83 in cash, and getting the long term assets (excluding goodwill of $6.8 million) including property, plant and equipment, and other assets worth 68 cents per share, for free.
COMPOSITION OF CURRENT ASSETS
Cash:107(million)
Inventory: 0
Receivables: 2.6
Other: 3
Cash Per Share:$10.83
Fixed and other Assets: 7 (million) excludes goodwill of 6.8 million)
Keep an eye on AMIE, and remember, the story here is cash. An improvement in the company's operating business
should keep cash burn to a minimum. With all that cash, a takeover is not out of the question
Fundamental data is of 12/31/02
Ambassadors International
Ticker: AMIE
Exchange: NASDAQ
Price: $8.62(2/21close)
Market Cap: 85(millions)
PE Ratio: 30
Shares Outstanding: 9.9 (million)
2002 sales: $14.7 (million)
Net Income: $1.6 (million)
Book Value per share: $10.16
Website: www.ambassadors.com
THE COMPANY
Ambassadors Intl. is another company you have probably never heard of, although you are probably familiar with the company's Chairmen (and 14% owner): None other than Peter Ueberroth, former Commissioner of Major League Baseball. The company is best described as a travel services compnay, that also markets and runs uncentive programs. In March, 2002, the company spun-off its educational travel segment, Ambassadors Group, which now trades separately on NASDAQ.
RECENT NEWS/PERFORMANCE
The company recently reported 2002 earnings of $ 1.57 million on sales of $14.7 million, for a decent profit margin, although, $2.5 million was non-operating income. There is not a lot of news on this company, and its average daily trading volume is just 30000 shares. The real story here is the balance sheet, as you will see later.
POTENTIAL CATALYSTS
Improving economy
The market discovering this company's asset story
An uptick in the company;s operating businesses
THE NCAV STORY (data as of 12/31/02)
Current Assets: 113(million)
Current Liabilities: 11
LT Debt: .0
Other LT Liabilities: 0
NCAV: 102
MKT Cap: 85
NCAV/MKT cap: 1.2 (ratio of NCAV to Mkt cap)
NCAV STORY
The story here, is cash and short-term investments, the current amount of which is $107 million. or nearly $11 per share. There is a minimal amount of accounts receivable, and no inventory to speak of. If you buy this stock at the current price of $8.62 (be careful of bid/ask spreads, this company averages just 30000 shares per day), you are theoretically buying $10.83 in cash, and getting the long term assets (excluding goodwill of $6.8 million) including property, plant and equipment, and other assets worth 68 cents per share, for free.
COMPOSITION OF CURRENT ASSETS
Cash:107(million)
Inventory: 0
Receivables: 2.6
Other: 3
Cash Per Share:$10.83
Fixed and other Assets: 7 (million) excludes goodwill of 6.8 million)
Keep an eye on AMIE, and remember, the story here is cash. An improvement in the company's operating business
should keep cash burn to a minimum. With all that cash, a takeover is not out of the question
Friday, February 14, 2003
COMPANY REPORT: 2/14/2003
Fundamental data is of 3rd quarter 2002
Blair Corp
Ticker: BL
Exchange: AMEX
Price: $22.00 (2/14close)
Market Cap: 177 (millions)
PE Ratio: 10
Shares Outstanding: 8 (million)
2002 sales: $580.7 (million)
Net Income: $9.3 (million)
Dividend Yiels:2.73% ($.15/quarter)
Book Value per share: $31.3
Website: www.blair.com
Phone: 814-723-3600
THE COMPANY
Blair is a direct marketer of fashion apparel for men and women. The company was founded in 1910, and is based in Warren, PA. Most of the company's business is via catalog, although the company is starting to generate a greater amount of business from its internet site (5% in 2001).
RECENT NEWS/PERFORMANCE
Sales growth has been minimal the past few years, although the company is seeing some success in reducing it's expenses. If the company continues to generate a greater amount of business from the net, costs should fall further; it;s not inexpensive to print and mail 40 million catalogs. If they are succesful here, operating margin expansion should occur.
POTENTIAL CATALYSTS
Increase in consumer spending
Improving economy
More internet business
New products/audiences
THE NCAV STORY
Current Assets: 281(million)
Current Liabilities: 83
LT Debt: .6
Other LT Liabilities: 1.5
NCAV: 198
MKT Cap: 177
NCAV/MKT cap: 1.12 (ratio of NCAV to Mkt cap)
NCAV STORY
Blair's accounts receivable have been decreasing, and inventory is sharply reduced from the same period last year. The story here, though is cash, nearly $7 per share, and no debt to speak of.
COMPOSITION OF CURRENT ASSETS
Cash:55(million)
Inventory: 72
Receivables: 139
Other: 15
Cash Per Share:$6.88
Fixed Assets: 56 (million)
Blair has a solid balance sheet, pays a 2.7% dividend, and is making inroads in cost reduction, and greater use of the internet. The company has returned 32.5 percent the past year, and has averaged more than 8.7% for the past five years. Keep your eye on this one. You may have never heard of Blair before, but despite it's small size, some institutions are owners, including Fidelity (9.7% stake as of 9/02).
Fundamental data is of 3rd quarter 2002
Blair Corp
Ticker: BL
Exchange: AMEX
Price: $22.00 (2/14close)
Market Cap: 177 (millions)
PE Ratio: 10
Shares Outstanding: 8 (million)
2002 sales: $580.7 (million)
Net Income: $9.3 (million)
Dividend Yiels:2.73% ($.15/quarter)
Book Value per share: $31.3
Website: www.blair.com
Phone: 814-723-3600
THE COMPANY
Blair is a direct marketer of fashion apparel for men and women. The company was founded in 1910, and is based in Warren, PA. Most of the company's business is via catalog, although the company is starting to generate a greater amount of business from its internet site (5% in 2001).
RECENT NEWS/PERFORMANCE
Sales growth has been minimal the past few years, although the company is seeing some success in reducing it's expenses. If the company continues to generate a greater amount of business from the net, costs should fall further; it;s not inexpensive to print and mail 40 million catalogs. If they are succesful here, operating margin expansion should occur.
POTENTIAL CATALYSTS
Increase in consumer spending
Improving economy
More internet business
New products/audiences
THE NCAV STORY
Current Assets: 281(million)
Current Liabilities: 83
LT Debt: .6
Other LT Liabilities: 1.5
NCAV: 198
MKT Cap: 177
NCAV/MKT cap: 1.12 (ratio of NCAV to Mkt cap)
NCAV STORY
Blair's accounts receivable have been decreasing, and inventory is sharply reduced from the same period last year. The story here, though is cash, nearly $7 per share, and no debt to speak of.
COMPOSITION OF CURRENT ASSETS
Cash:55(million)
Inventory: 72
Receivables: 139
Other: 15
Cash Per Share:$6.88
Fixed Assets: 56 (million)
Blair has a solid balance sheet, pays a 2.7% dividend, and is making inroads in cost reduction, and greater use of the internet. The company has returned 32.5 percent the past year, and has averaged more than 8.7% for the past five years. Keep your eye on this one. You may have never heard of Blair before, but despite it's small size, some institutions are owners, including Fidelity (9.7% stake as of 9/02).
Saturday, February 08, 2003
COMPANY REPORT: 2/8/2003
Circuit City Stores
Ticker: CC
Exchange: NYSE
Price: $4.87(2/7 close)
Market Cap: 1055 (millions)
PE Ratio: 7.72
Shares Outstanding: 210.527 (million)
2002 sales: $12.7 billion
Net Income: $218.8 million
Book Value per share: $10.72
Website: www.circuitcity.com
Phone: 804-527-4000
THE COMPANY
Circuit City is the second largest electronics specialty discount retailer in the U.S., with more than 600 stores. The retail electronics business is extremely competitive, especially in this price-cutting, seemingly deflationary economy we are mired in. The field is crowded with competitors such as Best Buy. Other companies such as Wal-Mart, and Amazon which don't specialize in this area, also have a piece of the pie.
RECENT NEWS/PERFORMANCE
Neither has been good. This week, the company announced layoffs of 2000, a new compensation structure to cut costs, and that 4th quarter earnings would be below expectations. A year ago, the stock was around $20, and now trades at less than $5.
Current P/E is less than 7, but that does not tell the whole story (it seldom does). Although the company is still profitable, it;s profit margins are eroding.
POTENTIAL CATALYSTS
Increase in consumer spending
Resolution of Iraq situation
Improving economy
Competitors going under
Pricing Power
THE NCAV STORY
Circuit City is currently the largest company (by market cap) trading below its NCAV.
Current Assets: 3631(million)
Current Liabilities: 1903
LT Debt: 12
Other LT Liabilities: 159
NCAV: 1558
MKT Cap: 1055
NCAV/MKT cap: 1.48 (ratio of NCAV to Mkt cap)
If this company has anything going for it as far as NCAV goes, its the fact that it has a lot of cash. While inventory is the largest component of current assets, that is par for the course for a retailer.
COMPOSITION OF CURRENT ASSETS
Cash:438(million)
Inventory: 2375
Receivables: 231
Other:587
Cash Per Share:$2.09
Fixed Assets: 693 (million)
This is a company to watch. It has a tough road ahead of it, but balance sheet is strong. The company has little debt, and more than $2 per share in cash. It is a very difficult environment for this type of company, but keep your eye on the economy.
Circuit City Stores
Ticker: CC
Exchange: NYSE
Price: $4.87(2/7 close)
Market Cap: 1055 (millions)
PE Ratio: 7.72
Shares Outstanding: 210.527 (million)
2002 sales: $12.7 billion
Net Income: $218.8 million
Book Value per share: $10.72
Website: www.circuitcity.com
Phone: 804-527-4000
THE COMPANY
Circuit City is the second largest electronics specialty discount retailer in the U.S., with more than 600 stores. The retail electronics business is extremely competitive, especially in this price-cutting, seemingly deflationary economy we are mired in. The field is crowded with competitors such as Best Buy. Other companies such as Wal-Mart, and Amazon which don't specialize in this area, also have a piece of the pie.
RECENT NEWS/PERFORMANCE
Neither has been good. This week, the company announced layoffs of 2000, a new compensation structure to cut costs, and that 4th quarter earnings would be below expectations. A year ago, the stock was around $20, and now trades at less than $5.
Current P/E is less than 7, but that does not tell the whole story (it seldom does). Although the company is still profitable, it;s profit margins are eroding.
POTENTIAL CATALYSTS
Increase in consumer spending
Resolution of Iraq situation
Improving economy
Competitors going under
Pricing Power
THE NCAV STORY
Circuit City is currently the largest company (by market cap) trading below its NCAV.
Current Assets: 3631(million)
Current Liabilities: 1903
LT Debt: 12
Other LT Liabilities: 159
NCAV: 1558
MKT Cap: 1055
NCAV/MKT cap: 1.48 (ratio of NCAV to Mkt cap)
If this company has anything going for it as far as NCAV goes, its the fact that it has a lot of cash. While inventory is the largest component of current assets, that is par for the course for a retailer.
COMPOSITION OF CURRENT ASSETS
Cash:438(million)
Inventory: 2375
Receivables: 231
Other:587
Cash Per Share:$2.09
Fixed Assets: 693 (million)
This is a company to watch. It has a tough road ahead of it, but balance sheet is strong. The company has little debt, and more than $2 per share in cash. It is a very difficult environment for this type of company, but keep your eye on the economy.
Saturday, February 01, 2003
Ben Graham is considered to be the father of value investing, and although his principals seemed antiquated during the bubble, they still have application in today's market. Graham's focus on having a margin of safety in investments is as meaningful today, as when he first put pen to paper.
One of Graham's strategies focused on identifying companies trading below their "Net Current Asset Value", which is defined as:
Current Assets minus (Current Liabilities+Preferred Equity+Long Term Debt + Other Long Term Liabilities)
The product of this equation is then compared to a company's market capitalization. In cases where market cap is less than net current assets, you may (the operative word is may) have found a bargain. Why? Because net current asset value does not even consider the value of long-term (or non-current assets) such as property plant and equipment, land, long term investments. Therefore, buying a company trading below its NCAV is like getting the rest of the assets for free.
Graham preferred companies trading at less than 2/3 of their NCAV, which allowed a greater margin of safety. Word of warning though, companies may be trading at these levels for good reason. They may be in trouble, and Graham was very clear on this point in his writings. Howevever, the analysis of such companies is still well worth the effort.
In building this web page, the intent is to educate readers about this investment technique, the ins and outs, what to look for in NCAV companies, and why. As the concept is further explained in the coming weeks, short research reports on companies meeting the criteria will be also be posted.
RESULTS OF THIS STRATEGY
Unfortunately there have not been many studies (outside of Graham's research, that is) on the success or lack thereof of buying companies trading at less than their NCAV. One, by Professor Joseph Vu of Depaul University from (1988) found that buying these companies, then selling two years later beat the market by 24 percent.
Tweedy Browne, an investment management firm (these guys are the real deal, excellent value managers), publishes a booklet titled "What Has Worked In Investing", which also references the NCAV strategy, saying that it's research "indicated that companies satisfying the net asset value criterion have not only enjoyed superior common stock performance over time, but also have often been priced at significant discounts to "real world" estimates of the specific value that stockholders would probably receive in an actual sale or liquidation of the entire corporation."
WHY YOU HAVE NOT PREVIOUSLY HEARD ABOUT THIS STRATEGY
The bottom line is that you will not find many well known companies meeting the criteria. The large majority will be small companies, with market caps below $100 million. Analysts typically don't follow these companies, institutions don't own them, so they don't generate much press. Some are fallen technology companies, chock with cash, but unfortunately, that cash is being burned very quickly, and the companies are not profitable. You can also find companies that are making money, have great balance sheets, and a potentially positive future. This is where the analysis comes in.
WHAT TO LOOK FOR IN TERMS OF THE BALANCE SHEET
The composition and quality of a company's current assets is an important factor as to whether you are truly getting a bargain. All else being equal, the greater the amount of cash and marketable securities as a percentage of current assets, the better. In terms of true value, it goes down hill quickly for the other current asset accounts. Accounts receivable, for instance, must be collected in order for value to be realized, and there are no guarantees this will happen. Inventories may be worth pennies on the dollar if they needed to be quickly converted into cash, plus there are storage and maintenance costs. Cash, on the other hand, has a fixed value. What you see is what you get.
PATIENCE, PATIENCE,PATIENCE
Thats exactly what this strategy demands. Even if you uncover a true gem, it may take a long time for the market to realize a company's true value. You may find a company with tremendously undervalued assets (remember, if you buy a company below it;s NCAV, you essentially get the long term assets for free), but you should also look for a potential catalyst. Look for companies who have positive earnings (many NCAV companies do not), who have the potential to increase earnings in the future. Loads of cash, along with in-demand products will buy these companies time to make their strategies work. While, those that are bleeding red ink, and have little cash may be headed to bankruptcy.
WATCH OUT FOR WIDE BID/ASK SPREADS
Since most NCAV companies are small, and have relatively low trading volume, the bid/ask spreads can be huge. Always use limit orders when buying or selling. A market order placed for a thinly traded issue can really hurt when buying or selling.
GET TO KNOW THE COMPANIES
Read the 10K, know what business the company is in, know its financials, and don't be afraid to call the company for more information. Don't buy if you can't explain the business in one sentence. This strategy is risky, so do your homework.
One of Graham's strategies focused on identifying companies trading below their "Net Current Asset Value", which is defined as:
Current Assets minus (Current Liabilities+Preferred Equity+Long Term Debt + Other Long Term Liabilities)
The product of this equation is then compared to a company's market capitalization. In cases where market cap is less than net current assets, you may (the operative word is may) have found a bargain. Why? Because net current asset value does not even consider the value of long-term (or non-current assets) such as property plant and equipment, land, long term investments. Therefore, buying a company trading below its NCAV is like getting the rest of the assets for free.
Graham preferred companies trading at less than 2/3 of their NCAV, which allowed a greater margin of safety. Word of warning though, companies may be trading at these levels for good reason. They may be in trouble, and Graham was very clear on this point in his writings. Howevever, the analysis of such companies is still well worth the effort.
In building this web page, the intent is to educate readers about this investment technique, the ins and outs, what to look for in NCAV companies, and why. As the concept is further explained in the coming weeks, short research reports on companies meeting the criteria will be also be posted.
RESULTS OF THIS STRATEGY
Unfortunately there have not been many studies (outside of Graham's research, that is) on the success or lack thereof of buying companies trading at less than their NCAV. One, by Professor Joseph Vu of Depaul University from (1988) found that buying these companies, then selling two years later beat the market by 24 percent.
Tweedy Browne, an investment management firm (these guys are the real deal, excellent value managers), publishes a booklet titled "What Has Worked In Investing", which also references the NCAV strategy, saying that it's research "indicated that companies satisfying the net asset value criterion have not only enjoyed superior common stock performance over time, but also have often been priced at significant discounts to "real world" estimates of the specific value that stockholders would probably receive in an actual sale or liquidation of the entire corporation."
WHY YOU HAVE NOT PREVIOUSLY HEARD ABOUT THIS STRATEGY
The bottom line is that you will not find many well known companies meeting the criteria. The large majority will be small companies, with market caps below $100 million. Analysts typically don't follow these companies, institutions don't own them, so they don't generate much press. Some are fallen technology companies, chock with cash, but unfortunately, that cash is being burned very quickly, and the companies are not profitable. You can also find companies that are making money, have great balance sheets, and a potentially positive future. This is where the analysis comes in.
WHAT TO LOOK FOR IN TERMS OF THE BALANCE SHEET
The composition and quality of a company's current assets is an important factor as to whether you are truly getting a bargain. All else being equal, the greater the amount of cash and marketable securities as a percentage of current assets, the better. In terms of true value, it goes down hill quickly for the other current asset accounts. Accounts receivable, for instance, must be collected in order for value to be realized, and there are no guarantees this will happen. Inventories may be worth pennies on the dollar if they needed to be quickly converted into cash, plus there are storage and maintenance costs. Cash, on the other hand, has a fixed value. What you see is what you get.
PATIENCE, PATIENCE,PATIENCE
Thats exactly what this strategy demands. Even if you uncover a true gem, it may take a long time for the market to realize a company's true value. You may find a company with tremendously undervalued assets (remember, if you buy a company below it;s NCAV, you essentially get the long term assets for free), but you should also look for a potential catalyst. Look for companies who have positive earnings (many NCAV companies do not), who have the potential to increase earnings in the future. Loads of cash, along with in-demand products will buy these companies time to make their strategies work. While, those that are bleeding red ink, and have little cash may be headed to bankruptcy.
WATCH OUT FOR WIDE BID/ASK SPREADS
Since most NCAV companies are small, and have relatively low trading volume, the bid/ask spreads can be huge. Always use limit orders when buying or selling. A market order placed for a thinly traded issue can really hurt when buying or selling.
GET TO KNOW THE COMPANIES
Read the 10K, know what business the company is in, know its financials, and don't be afraid to call the company for more information. Don't buy if you can't explain the business in one sentence. This strategy is risky, so do your homework.
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