individualinvestor.com
Research Analyst: Christopher Conry (9/7/00)
Most investors prefer to buy stock in companies with solid business plans and real earnings that don't carry outlandish valuation multiples. Others have a soft spot for distressed stocks, especially ones poised for a big rebound.
When a stock's down 90% from its high, business prospects are fragile, Wall Street is running for cover, and bankruptcy seems just around the corner - it's the kind of contrarian play that catches an investor's eye. And the prospect of capturing monster returns from a distressed stock's turnaround has an undeniable allure.
But buying such stocks is a huge gamble, since there are usually good reasons for them to be beaten down. Especially daunting is how to determine whether these distressed companies are truly on the comeback trail.
You could use book value -- total assets minus total liabilities -- to find such stocks. The problem is that measure doesn't give you the true market value of a firm's assets, or tangible book value, which eliminates goodwill or other "intangible" assets like patents and trademarks.
One way to lessen the odds that your roll of the dice won't come up snake eyes on the first throw: screen for stocks trading below their cash assets per share as of the most recent quarter.
We created a FactSet screen to mine for stocks that were trading at levels below the companies' cash assets per share as of the most recently reported quarter. Surprisingly, 294 names passed that hurdle.
To narrow the list further, we looked for companies where current assets minus total liabilities still exceeded the stock's total market value.
We even eliminated stocks with market caps under $10 million, and companies with negative shareholders' equity balances.
Thirteen stocks made the cut. To view the entire list of companies, please click here.
Before we get into our best ideas from this list, our screening criteria is quite similar to valuation techniques already in print, in none other than the "Bible" of Wall Street value investing: "Security Analysis," by Wall Street legend Benjamin Graham and his disciple David Dodd.
Although it was originally published in 1934, this and many of the value investing theories the book details are still practical and useful today.
This is what Graham and Dodd had to say:
"There is scarcely any doubt that common stocks selling well below liquidating value represent on a whole a class of undervalued securities. They have declined more severely than the actual conditions justify. This must mean that on the whole these stocks afford profitable opportunities for purchase."
Liquidating value is similarly described as a company's current asset value - current assets minus all liabilities and claims ahead of the issue, which in this case is common stock. Graham and Dodd reasoned that noncurrent assets are likely to offset most of the discount a company may face if it actually liquidates its current assets. As a result, the "current asset value affords a good rough measure of the liquidating value."
To take it one step further, Graham and Dodd also use a stock's cash asset value to search for investment bargains. This is defined as cash (and cash equivalent) assets alone minus total liabilities and claims ahead of common equity.
Screen: Our List of Distressed But Cheap Stocks
Company
(Ticker) Closing Price
Sept. 6 Current
Asset Value
Per Share Cash
Asset Value
Per Share Market Discount To
Current
Asset Value Market Discount To
Cash
Asset Value
MOMENTUM BUSINESS (MMTM) 11.50 44.26 44.09 74% 74%
TELEMATE.NET (TMNT) 2.25 4.14 3.65 46% 38%
CALTON (CN) 4.63 7.67 7.31 40% 37%
NATIONAL AUTO CREDIT (NAKD) 0.78 1.91 1.02 59% 24%
FASHIONMALL.COM (FASH) 2.44 4.79 3.15 49% 23%
IMPROVENET (IMPV) 2.06 2.90 2.58 29% 20%
PETS.COM (IPET) 0.97 1.68 0.91 42% -7%
MGI PROPERTIES (MGI) 2.31 3.02 1.82 23% -27%
PLANETRX.COM (PLRX) 0.69 0.81 0.43 14% -62%
FIRST AVIATION SVCS (FAVS) 5.03 5.81 1.16 13% -333%
SALANT CORPN (SLNT) 2.75 6.35 -0.34 57% NM
CYRK (CYRK) 4.31 5.60 -4.19 23% NM
MAXCOR FINANCIAL GROUP (MAXF) 1.53 2.79 -2.18 45% NM
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