I second that notion, on ALSC!
How much would you pay for a $138M savings account (current assets minus all liabilities) that is losing $80M per year? They are losing $20M a quarter on $4M sales, with hugely negative gross margins. In my opinion, the company is in disastrous shape - MUCH worse than ATML which the market took down to 60 cents (before a major rally) because of concerns they won't be able to pay off their debt coming due over the next several years.
TIBX which I publicly recommended elsewhere before its recent rally was a sound speculation of this type, with a mountain of cash, a clear leadership position in its niche, and not losing money. I also think that LTBG is a similar situation at recent prices in the $5's.
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The key thing these articles do not address is that you have to consider the value of the business relative to the cash. For example, why would you want to consider a stock with $10 per share of cash and a business worth $1, even if it was selling below cash and not losing money, unless it had stated plans to liquidate. You are buying a large risk as to what they will do with the cash. I don't like odds like that. A better way to look at these companies is to look for ones selling at the value of the business with major excess cash thrown in for free. That is the LTBG situation, in my opinion.
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A comment on companies with debt, which was discussed earlier. Debt makes no sense with a highly cyclical business, like airlines, electronic contract manufacturers, semiconductor equipment, steel, etc. As far as I am concerned, a company in those industries with a lot of debt has both a bad business strategy and bad management - as they are constantly betting the company on never having a major recession in their industry. However, I see nothing wrong with reasonable amounts of debt in non-cyclical businesses, with decent gross margins and cash flow. |
