While this article is interesting, CN is probably dead money at this point:
thestreet.com
The Ultimate Value Play: Stocks Worth
Less Than Their Cash
By John Rubino
Special to TheStreet.com
11/10/00 10:42 AM ET
It took a little longer than usual this time, but Benjamin Graham is once again
back in style. The godfather of value investing, his Security Analysis is the most
owned and least read book in the business. His ideas are dismissed in every bull
market, only to regain respect when excess leads to chaos.
In a nutshell, Graham believed that the crowd is usually wrong, and that the best
returns therefore come from buying what no one else wants -- after making damn
sure it's not going bankrupt.
His kind of stocks come in two varieties: earnings plays, where the price is
extremely low in relation to sustainable profits; and asset plays, where the value
of a company's cash, inventories, factories or whatever exceeds its stock price. It
has been so long since either was common that I'd gotten out of the habit of
looking for them. But this week I did a screen for the purest kind of asset play,
where cash on hand exceeds the stock price, and found there are dozens of
them.
Cash-rich companies are interesting for at least three reasons. First, since cash
is easy to value, you know exactly what that part of the balance sheet is worth. If
it exceeds the stock price, you get the rest of the company for free. Second, in
hard times -- which I'm increasingly convinced are coming -- cash protects a
company from panicked creditors, guaranteeing its survival. Third, in the
aforementioned hard times, a big cash balance allows a company to buy up
competitors' assets for a song when no one else wants them.
In short, they're defensive plays going into bear markets and -- if they make wise
acquisitions at the bottom -- growth plays coming out the other side. But you've
got to tread carefully here. In calculating cash, subtract out the company's debt
to get a "net cash" number, and use this for comparison with the stock price.
And -- the voice of bitter experience here -- pay special attention to the structure
of a company's balance sheet. If a company's debt is all short-term, it might
gobble up a big part of the cash balance when it comes due.
Finally, and by far most important, watch the burn rate -- $100 million in cash can
evaporate in no time if a company is losing $75 million a year. Stamps.com
(STMP:Nasdaq - news), to take just one of the zillion possible New Economy
examples, has cash per share that exceeds its stock price, but if current trends
continue, it will burn through it in two years.
And don't take the stock quote services at their word. I was all set to make
Airspan (AIRN:Nasdaq - news) a central part of this story because Yahoo!
Finance listed cash per share of $35, vs. a share price of $6. But according to
the company's most recent 10-Q report filed with the Securities and Exchange
Commission, net cash is actually less than a buck a share. So always verify
balance-sheet stats through services like 10K Wizard or Free Edgar.
Because we're just at the beginning of what might be a bear market to remember,
most of the cash plays out there now are flawed in one way or another. But a
couple are worth a look.
Calton (CN:Amex - news) was a home builder until it sold out in 1999 and
became, in effect, a tech company incubator. Its three start-ups, eCalton,
PrivilegeONE and Innovation Technology, are eating cash at the rate of
around $2 million a quarter. And, given the probable nasty year ahead for tech
start-ups, there's no reason to expect a letup anytime soon. But with cash of $32
million and no debt, Calton's net cash per share comes to $7.50 vs. a Thursday
closing price of $3.56.
Momentum Business Applications (MMTM:Nasdaq - news) was formed in
1998 by PeopleSoft (PSFT:Nasdaq - news) as a development arm for
applications "outside PeopleSoft's traditional areas of product development
focus." PeopleSoft gave Momentum $250 million -- those were heady days -- and
then distributed its stock to existing shareholders.
Momentum is now a separate company, though under a development agreement
with PeopleSoft, it's obligated to create products to meet PeopleSoft's needs,
using the latter's staff and software development tools. Momentum will own the
applications it creates, though PeopleSoft will have the option to license and/or
buy them.
This is one of the odder deals you'll come across. But the balance sheet is nice
and clear: net cash of $40 a share vs. a price of $10. |
