Jewish World Review May 22, 2002 / 11 Sivan, 5762
James K. Glassman
Reel in these stocks
Bottom-fishing can be a dangerous sport. The idea is to find stocks that have submerged so deep that no one pays attention to them. You hook them, and they start rising again. You hope.
Most of the time, individual stocks get cheap for a good reason. Remember that prices are set not at random, but by the actual buying and selling of thousands of investors, who rely on all the public information they can glean. Sometimes, anomalies occur, and you can find a good company selling for an absurdly low price, but humility is usually the right posture to assume before the market. In general, it prices things more accurately than you can.
Also remember that what goes low can stay low -- or can go even lower. When Qwest Communications International, which once traded as high as $66 a share, fell from $35 in May 2001 to $12 in December, it looked cheap. But it kept falling. By early May 2002, it was less than $5.
Still, there's no better feeling than landing a bottom fish. It's a thrill, both intellectually and financially. One of the best approaches to finding such stocks is to focus not on earnings but on assets -- on what the company owns. That was a favorite strategy of the late Benjamin Graham, whose name pops up frequently in this column. Graham was a classics scholar who translated books from Portuguese and taught finance at Columbia University and was a mentor to, among others, Warren Buffett, whom I consider the best investor of the 20th century. Graham was a highly successful investor, too (Geico, the insurance company that's now owned in full by Buffett's Berkshire Hathaway Inc., was one of his huge winners). Graham's firm, Graham-Newman Corp., was a big customer of Tweedy & Co., founded in 1920 by Forrest Berwind Tweedy, a mellifluous Wall Street name. That firm is still around under a slightly different name: Tweedy, Browne Co. (www.tweedy.com).
Tweedy, Browne publishes a brilliant, modest-looking investment booklet called "What Has Worked in Investing" -- a look, through historical data, at which strategies actually pay off. A conclusion it draws is that one of Graham's investing techniques -- buying companies at less than their "net current asset value" (NCAV) -- has been an exceptional winner. The approach utterly ignores profits and concentrates on assets.
What's hard is finding such companies. In Graham's day they were ripe for the picking, but until recently they were extremely scarce in the U.S. market. No longer. Now, according to an article by Jonathan Heller in Bloomberg Personal Finance, there are "hundreds of companies trading below their NCAVs."
Here's how to calculate NCAV: Look up a company's balance sheet on its Web site or Yahoo Finance or practically any other online financial service. Then take its total current assets (basically, the firm's cash, investments, receivables and inventory) and subtract from that figure its current liabilities (short-term debt and payables) plus its long-term debt, preferred stock, pension obligations and leases (all this is easy to find). The result is NCAV. Then compare the number with the company's market capitalization. Graham tried to find companies with market caps that were one-third below NCAV, giving him his famous "margin of safety." In other words, he liked to buy a dollar for 67 cents. Who doesn't?
Many of Heller's discoveries turn out to be high-tech companies that are sitting on piles of cash raised from initial public offerings or venture capitalists but that don't have much in the way of a business. An example is Netro Inc., a wireless-equipment maker that in 2001 registered just $24 million in revenue (down by two-thirds from the previous year) and $79 million in losses. By my own calculation, its NCAV was $190 million (including $206 million in cash, with no debt), and its market cap was $133 million, a discount of 29 percent, or nearly Grahamian proportions.
Of course, the cash goes out the door pretty quickly when you're losing about $1.5 million a week. Netro is one of those firms that is probably worth more dead than alive. Liquidate it and hand the money to investors and they make a 40 percent profit. Unfortunately, managers, who like their jobs, are loath to do such things. Meanwhile, a nasty proxy fight has developed for control of the company -- again, no surprise, considering all that cash lying around.
National Presto Industries, which makes housewares and small appliances, including the beloved SaladShooter and Frydaddy, is another matter. Revenue has risen only about 3 percent annually for the past three years and earnings have declined, but they definitely exist. The company, based in Eau Claire, Wis., has been consistently profitable, and it's paid a nice dividend. Presto's recent NCAV was roughly equal to its market cap, but it had nearly $200 million in cash and short-term investments (pretty much the entire NCAV) and no debt at all.
The problem for National Presto is the lack of a hot new product. While there's abundant cash, the firm cut its dividend last year from $2 to 92 cents -- the lowest payout in at least 15 years. Further bad news is that the stock rose 30 percent from March (when market cap was far below NCAV) to May, but the company gets a good rating from Value Line, and the dividend yield is still a decent 2.6 percent.
Blair Corp., a mail-order apparel company, is another Graham-style firm, with a market cap slightly below its NCAV. While Blair actually makes a profit, look closely at the balance sheet: The current assets are overwhelmingly in receivables, with cash minuscule and debt not insignificant. I'll pass. A better candidate is ValueClick, which is in the unenviable business of selling Internet "advertising solutions." Revenue fell by one-third last year, but the firm managed to reduce its losses significantly. It has an NCAV of $150 million, nearly all in cash, with a recent market cap of $136 million.
How do you find Grahamian candidates? An excellent place to start is the Value Line Investment Survey, which each week lists stocks with the "widest discounts from book value." In fact, such companies are often worth considering, no matter whether they have NCAV discounts or not. Book value is a company's net worth on its balance sheet. It includes plant and equipment -- which are long-term, rather than safer current, assets. Still, the list turns up interesting possibilities. One is Dillard's Inc., the retail chain. It trades at a discount of about one-fourth to book value, but, unlike many cheap stocks, Value Line ranks it "1" (that is, among the top 100 stocks) for year-ahead appreciation potential and "3" (average) for safety. The question with stocks like Dillard's is whether their inventory and their buildings -- which tend to be their main assets -- are really worth what the balance sheet says they're worth. Cash is more reliable.
Consider PacifiCare Health, which owns several health maintenance organizations. Its net worth on the balance sheet is about $2 billion, with 35 million shares outstanding. That comes to a book value per share of about $57, and the stock in early May was trading at just $26. PacifiCare has about $2 billion in cash and short-term investments and $900 million in debt and capitalized leases. Value Line gives the stock a rating of "2" (above-average) for timeliness and "3" (average) for safety but warns that the shares "seem appropriate only for speculative investors" partly because of "relatively limited experience in managing medical expenses under risk-based contracts."
That does not sound good, but you don't find stocks that are both cheap and perfect. PacifiCare expects to recover its equilibrium and earn about $3.45 this year, which gives it a price-to-earnings ratio, or P/E (based on projected profits), of less than 8. And this is a company that in 1999 earned $6.27 and continues to have a powerful cash flow. Again, the stock has risen lately (from a low of just $15 in March). It's risky, but certainly attractive.
What about mutual funds? None (that I can find, anyway) follows the discount-to-assets strategy. But there are a few intriguing alternatives. Two are managed by Tweedy, Browne: American Value and Global Value. Each has a five-star (best) rating from Morningstar and owns stocks that trade at price-to-book (P/B) ratios that are well below the market average of 5. Leading holdings of the American fund include Torchmark Corp., an insurance company with a low P/E and P/B, and PanAmerican Beverages, a Coca-Cola distributor. Global Value's top two stocks at last report were Nestle, the Swiss food giant, and Bayer, the German-based chemical and drug company.
The third intriguing fund is Excelsior Value and Restructuring, which has beaten the majority of its peers in eight of the past 10 years, has whipped the benchmark Standard & Poor's 500-stock index by an annual average of 14 percentage points over the past three years and also possesses five Morningstar stars. Manager David Williams looks for fallen heroes and isn't afraid to invest in technology stocks such as Vishay Intertechnology, which has a low P/B, significant cash and little short-term debt. Vishay, which makes electronic components, had a terrible year in 2001 but earned $3.75 a share in 2000 and was recently trading at just $20.91.
Do not, however, simply swallow my tips. Cast for your own bottom fish -- online or elsewhere. Just remember that, while discounts to book value and net asset value are alluring, earnings do count. A company with fabulous assets, no debt and a lousy business may never be liquidated or bought out, so you're left sitting with a fishy investment that will start to stink. Still, in this market there's little reason to
JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.
05/15/02: It's a "small" world
05/02/02: Japanese stock growth?
04/30/02: Trust the Bells?
04/24/02: Being there is best revenge
04/18/02: I'm a Seoul man
04/16/02: Analyze this
04/09/02: The Dot.Con con game
03/21/02: The companies you keep
02/28/02: Trusting monopolists
02/22/02: How not to get taken when buying stocks
02/06/02: Investing After 9/11
01/30/02: Blue Light Specials? Advice on snapping-up K-Mart or Enron stock
01/24/02: Dare to be obscure
01/16/02: Bank on this
01/10/02: What goes down...
01/04/02: An asset-focused investor finds 'deep value' stocks
12/26/01: High-Tech Funds Low On Tech
12/19/01: Tech Sector: Blodget, Meeker, and You
12/12/01: Enron's lessons: Be skeptical of experts
12/04/01: CLECs alive and well, but not if Tauzin-Dingell passes
11/15/01: The "Next Big Thing" in Technology?
10/30/01: A National I.D. Card? Yes; Run By Larry Ellison? No
10/25/01: Without Bayer, we're bare to bioterror
10/18/01: The Battle of Biotech
10/05/01: Two Techs for Tough Times
09/26/01: The Information War
09/05/01: Tech firms built to last through tough times
08/23/01: Stocks on the A-List
08/17/01: Labor and management finding online learning to their liking
08/08/01: Game makers poised to profit
07/19/01: Trade Promotion Authority: High-Techís Key Component for Competitiveness
07/12/01: Nothingís arbitrary about the contrarians
06/27/01: Look to Politics to Find Broadband's Market Cap Shortfall
06/22/01: Tech Commodity Buys Available for Mining
06/18/01: The Blackout Portfolio
06/14/01: The conservation myth stars as latest (sub)urban legend
06/07/01: Will America go high tech on the high seas?
06/05/01: 'Price gouging' doesn't cut it as reason for rising energy prices
06/01/01: Authentication tools opening up opportunities in online security
05/25/01: 'Price gouging' doesnít cut it as reason for rising energy prices
05/21/01: Banking on High-Tech Education
05/17/01: It's No Time to Go Wobbly on Kyoto
05/02/01: Diversify with techís leaders
04/26/01: To Revive The New Economy, Release A Chokehold Break Up The Bells
04/24/01: Whoís To Blame For Broadband Crisis? Wired Article Points To Bells
04/19/01: The Bush Budget
04/12/01: To revive The New Economy, release a chokehold --- break up the Bells
04/04/01: Even as stocks have fallen, the Net keeps booming
03/28/01: Whereís The Profit In Biotech Future?
03/22/01: The Joy of Debt: The last thing we should want is a U.S. Treasury flush with cash
03/19/01: 'Defensive' Stocks in the NASDAQ
03/15/01: Bush administration must say no to Jane and Kyoto
03/08/01: Time to buy small caps? Consider these five great techs
03/01/01: Billís and Larryís continued political adventures
02/26/01: Chips on the Dips?
02/23/01: How Tauzin Can Keep His Word And Stop Telecom "Remonopolization"
02/13/01: Consumers, WAKE UP! Middlemen are ripping you off
02/02/01: Publicity-Seeking Politicians and Contingency-Fee Lawyers Corrupt the Law
01/26/01: DoubleClick, eBay And Their Promising Ilk
01/24/01: Will Cyberspace Look Like France or America?
12/27/00: Cut interest, taxes and regulation to save high-tech economy
12/20/00: Close, But No Big Czar
12/15/00: A Down Year? Maybe. But Letís Put It in Perspective
12/13/00: Clintonís sorry midnight race into history
12/07/00: Is Telecomís Future The Bells, The Bells, and Only The Bells?
12/01/00: Money talks and walks in election aftermath
11/29/00: Climate Treaty Deadlock Shows Lack of Consensus and Common Sense
11/23/00: Climate change participants donít listen to reasons for uncertainty
11/21/00: Will Regulators Create a Recession?
11/14/00: The Election and the Market
10/26/00: Hang on for the long term
10/25/00: On privacy, one size doesnít fit all
10/24/00: Perish the bearish thought
10/19/00: Beating hunger --- the biggest prize
10/13/00: Way to play biotech
10/12/00: Bush vs. Gore on Technology
10/11/00: Global Climate Scare: Fools Rush In
10/05/00: Avoid the Apple Trap
10/03/00: Goodbye, anti-Microsoft crusader --- and good riddance
09/29/00: Should You Invest in Tech IPOs?
09/27/00: Could technology end airline delays?
09/22/00: Donít Forget Small Caps
09/20/00: Is the New York Times Rooting for Disaster?
09/13/00: The Best Argument Against Net Regulation
08/30/00: Political Risk in Big Drug Stocks
07/27/00: Tech Dividends
07/25/00: Government Privacy Violators
07/20/00: If I Had to Pick One Tech Stock
07/18/00: Our Favorite Lawsuit
07/13/00: Silicon Valley East
07/11/00: Election 2000: Year of the Investor Class?
07/07/00: Adventures on the Amazon.com
07/06/00:The Difference Between Bill Gates and Larry Ellison
06/29/00: In the Chips
06/27/00: Free market wins in Federal Court!
06/22/00: Wireless Bargains?
06/20/00: Is Your SUV Warming the Planet?
06/15/00: Shopping for Government
06/13/00: Top 10 Tech Stocks
06/08/00: Riding the eBook Wave
06/06/00: "The Last Mile"
06/02/00: Keep Buying!
05/31/00: Who Asked the FTC to Regulate Online Privacy?
05/25/00: "When Itís Time to Sell"
05/23/00: End the "Telephone Tax"
05/16/00: Time Warner Gets a Bad Rap
© 2002, Tech Central Station