Paul, thanks for your thought on GEG.
MSN Money put out an interesting list of cash rich stocks last week. AVCI is included in this list.
moneycentral.msn.com
15 stocks you can buy for 'free'
Some companies have cash on hand that outweighs their market capitalization, but even then, they're not always a good deal. Here's how to find the ones that are.
By Michael Brush
If the market’s talking heads have your head spinning with their endless debate about whether stocks are overvalued on false dreams of recovery, here's a simple solution.
Try to put your money in businesses at the best possible valuation of all: for free.
This is easier than you might think. Many companies are sitting on loads of cash, in per-share amounts greater than what you might pay for their stocks, for two simple reasons:
They raised a ton of money during the 1990s stock market bubble.
The companies are in now much-hated sectors like e-business, business-to-consumer software or photonics -- remember those? These groups are so despised that the market has pummeled their stocks down to a hat size or less. And, more importantly, they’re trading at or below cash levels.
Consider Selectica (SLTC, news, msgs), a San Jose, Calif., company. Selectica provides software that helps companies sell goods on the Internet or through intranets, which are private networks connecting businesses. Its stock trades for below $2.70. The company has $2.90 per share in cash. So, buying stock in Selectica basically means you’re getting the business itself for free.Check out your options.
Record low rates
could save you a bundle.
That’s not a bad deal, if you believe that sooner or later the economy will pick up and demand is likely to return for this company, whose software is good enough for blue-chip customers such as General Electric (GE, news, msgs), Dell Computer (DELL, news, msgs), Cisco Systems (CSCO, news, msgs) and Aetna (AET, news, msgs).
Digging up the picks
One of the trickiest things about investing in these kinds of companies is actually finding them. Most are so small, they have no analyst coverage.
For help with the research, we turned to an old pro at the game: deep value investor John Buckingham, who always has a portion of his portfolio at the Al Frank Fund (VALUX) dedicated to what he likes to call “cash is king” stocks. Buckingham also edits an investment newsletter called the Prudent Speculator, ranked No. 1 by Hulbert Financial Digest.
Before we get to Buckingham’s short list of businesses selling on the cheap (if not for free), here are two pointers he offers about investing in stocks like these.
You have to buy many of them. At least seven will do, but 10 or more is even better. The reason: A few will disappear, but others will go up enough to make it all pay off. “Throw ‘em in your individual retirement account. Come back in couple years, and one of them is going to be up 1,000%,” says Buckingham. “That is all you need, if nine go to zero, to break even.” But with so much cash on the balance sheet at these companies, seeing that many go to zero is unlikely.
Be patient. Be very patient. Expect to hold these stocks for the long term. But if one happens to go up tenfold in 12 months, which can happen, be smart and take some profits.
There are essentially three ways you will hit pay dirt with these stocks.
The hard way is to simply slog it out for the two or three years it takes for business to improve.
If you’re a little luckier, a company’s industry sector will suddenly come into style, giving your stock a jolt. Several months ago, for example, Buckingham bought shares of SINA Corp. (SINA, news, msgs), a Chinese Internet stock, at around $1.50 as part of his cash-is-king play. Then, a mini-mania for Chinese portal stocks set in, SINA advanced more than sixfold, and Buckingham took some profits at around $9. The stock was at $10.31 on Friday.
Management or some one else will see the value of shares trading under cash value, and liquidate the company or make an offer.
With that in mind, here’s a short list of stocks trading at or near cash levels.
Apple Computer
Before we get to the tiny cash-is-king plays, let’s start with one everyone knows: Apple Computer (AAPL, news, msgs). This computer maker’s overhead is so low, it’s built up a cash hoard (cash and short-term investments) of $4.53 billion. That’s worth $12.38 a share. So if you buy the stock at the recent price of $13.40, you’re getting the computer business for just $1 per share.
But doesn’t it make sense that Apple’s business goes cheap? After all, demand is sluggish in the education and the creative fields where Apple is popular, and Apple’s been threatening to move into the risky entertainment business. “I think Apple is an innovative company, and the sector will turn,” responds Buckingham. “And I am in it for the long run.” But it's among the smaller, lesser-known companies that you’ll get more bang for your buck, admits Buckingham. Here’s a look at those plays.
Customer relations software
Net Perceptions (NETP, news, msgs). This tiny Minneapolis company jumped to $1.50 per share from $1.30 in early February on news it had hired U.S. Bancorp Piper Jaffray to help it find a potential buyer or partner. Now at $1.45, its shares still trade for far less than what might be a good starting point for a buyout price, or $2.30 per share -- the amount of cash per share at the company. Net Perceptions’ software is used to mine corporate databases to improve marketing at companies including 3M (MMM, news, msgs) and J.C. Penney (JCP, news, msgs).
Apropos Technology (APRS, news, msgs). At around $2 per share, the Oakbrook Terrace, Ill., company trades 17% below its cash per share level of $2.41. So if you buy Apropos stock, you’re getting its customer interaction management software business plus 41 cents for free. Yes, that business is losing money. But cost-cutting has reduced the cash burn rate to around $1.6 million per quarter, leaving room for a turnaround -- or buyout -- before the money runs out. Apropos software is used at Nokia (NOK, news, msgs), Kraft Foods (KFT, news, msgs) and GE Capital, the finance division of General Electric (GE, news, msgs).
Ascential Software (ASCL, news, msgs). This database management company trades above cash levels of $2.65 per share. Its stock recently changed hands for $3.80. But Buckingham still figures the Westborough, Mass. company’s a good buy because the company should turn profitable by conservative accounting measures later this year, and it has positive cash flow. The company’s database mining software is used by JP Morgan Chase (JPM, news, msgs) and Scotts (SMG, news, msgs), among others. The company expects at least 20% revenue growth this year.
A few dot-com survivors
Remember Boo.com and all the other high profile Internet business flameouts? They’re long gone. But Buckingham reckons he’s found a handful of promising businesses that ply their trade on the Internet and have enough cash to stick around until times get better.
Keynote Systems (KEYN, news, msgs). This company, based in San Mateo, Calif., has a cash hoard of $8.80 per share if you take out lease obligations. And it recently traded for around $9.50. So for 70 cents a share, you’re getting a business that has positive operating cash flow and should be profitable by a conservative accounting measure later this year. Keynote has a network of computers around the world that constantly test the performance of commercial Web sites.
Via Net.works (VNWI, news, msgs). At 75 cents a share, the company trades for less than half its $1.62 in cash per share. The Reston, Va., provider of Internet service to small businesses in Europe and the United States is burning through $8 million per quarter. But it has around $96 million in cash, so it should be able to last until the economy picks up.
Quotesmith.com (QUOT, news, msgs). The Darien, Ill., company, which offers insurance quotes online and owns the Insure.com news site, recently traded for $4, or well above cash levels of $3.32 per share. “But business prospects are more promising, and it will be profitable in the not-to-distant future,” says Buckingham.
FairMarket (FAIM, news, msgs). This Woburn, Mass., company has $2.08 per share in cash but it recently traded for $1.60. It helps companies sell excess inventory online, including through a partnership with eBay (EBAY, news, msgs).
Telecom and networking equipment
There’s little evidence capital spending at phone companies will pick up this year. But sooner or later it will, and the following equipment suppliers have enough cash -- and good enough technology -- to be around to benefit when that happens, speculates Buckingham.
Avici Systems (AVCI, news, msgs). The manufacturer of routers has anywhere from $6 to $10 per share in cash, depending on how you count some of its investments. Yet the onetime telecom equipment high flier recently traded for just $4. The North Billerica, Mass., company is burning through about $12 million per quarter but it has around $113 million in cash. Avici’s routers are used in a form of broadband transmission known as Internet protocol (IP), which is growing faster than other formats like frame relay or asynchronous transfer mode, in part because IP is cheaper to manage.
“The bottom line is the Internet is still growing at a very significant rate,” says Avici chief executive Steven Kaufman. “Carriers are looking to save money, and best way is to consolidate around IP equipment.” He expects 10% revenue growth next quarter, but won’t offer guidance beyond that because of uncertainty about capital spending at the phone companies.
CoSine Communications (COSN, news, msgs). Trading at $5 a share, this company looks like a bargain because it has about $8.25 in cash per share. The Redwood City, Calif., company develops switches and software used in IP networks. It burned through $11.2 million in the last quarter, but it has $102 million on hand. CoSine popped to $6 from $4 on takeover rumors last December, offering a taste of the potential profit in cash-is-king stocks if a buyout comes through.
New Focus (NUFO, news, msgs). The San Jose, Calif. company makes lasers used in broadband transmission and research. It has about $4 in cash per share but trades much lower at $3.15 per share. The company is burning about $5 million per quarter and has a cash hoard of $258 million.
3Com (COMS, news, msgs). The network equipment maker, headquartered in Santa Clara, Calif., holds around $4 in cash. It recently traded above $5. Up there, it’s already closing in on Wall Street's 12-month price targets of around $5.25. Plus, there has been lots of insider selling in the $4.80 to $5.10 range. So it might be better to wait for a pullback in this one.
Wireless equipment and services
Endwave (ENWV, news, msgs). This tiny company designs chips used to help transmit cell phone conversations the long distances between wireless base stations. It trades at just $1. But the Sunnyvale, Calif., company has an impressive cash hoard of $3.30 per share. The good news for Endwave, says Chief Executive Edward Keible, is that wireless equipment spending will pick up once cell phone companies merge so that infrastructure costs can be spread out among more customers. The bad news is that Wall Street doesn’t think that will play out for two or three years.
“So we are going out and doing other things,” says Keible. That includes designing chips used in satellite communications and defense electronics, like the weapons firing systems on Apache helicopters. Keible thinks these efforts, which now account for about 8% of revenue, will help his company produce positive cash flow by the end of this year.
Aether Systems (AETH, news, msgs). The company markets software that can put desktop applications onto wireless devices. It trades at just $3.50, even though it has about $4 per share in cash. Its software is used in law enforcement for writing reports, and at private sector firms like trucking companies and office supplies stores to track shipping. The cash burn rate was around $10 million last quarter, and the company, based in Owings Mills, Md., has around $169 million in cash.
Vyyo (VYYO, news, msgs). Tiny it is, with just 53 employees. Vyyo, makes equipment used to deliver high-speed data via wireless connections to businesses and homes, sells for just $2.50. But the Cupertino, Calif., company has $5.79 in cash per share. Chairman and Chief Executive Davidi Gilo owns 43% of the company.
Risky business
Even though all the cash at these companies seems to offer good protection, remember that nothing can protect you from managers who decide to do dumb things with the money.
Some may just use it all up before the company turns profitable. Another classic mistake: Making stupid acquisitions. Apple and 3Com, for example, are rumored to be on the prowl for acquisition targets, which elevates the risk of owning shares in those companies.
“The downside risk is that the money can be spent,” says Buckingham. “It is not really yours. But if you buy enough of these you are going to be very well rewarded.”
At the time of publication, Michael Brush owned or controlled shares in the following equities mentioned in this column: New Focus. |
