Most investors view stocks as lottery tickets – they buy and hope for the greater fool theory to kick in order to sell at a profit. More often than not however these investors lose a lot of money in the stock market, as they never seem to learn that stocks represent small portions of a business, which sells products or services and hopefully earns a decent profit while building on to its asset base.
Many investors have taken a beating recently, especially as the recession and bear market kicked in earlier in 2008. Some are bailing out of stocks completely, while seeking the relative safety of Treasury Bonds or Certificates of Deposit. Some investors however have seen the current bear market as an opportunity to load up on cheap stocks, which are trading below the net levels of cash on their balance sheets. The net-net strategy was popularized by Ben Graham who bought stocks after the Great Depression at steep discounts to the net asset values per shares realizing huge profits in the process.
Imagine a company ABC that has 1 million shares issued and outstanding trading at $0.50/share, has zero debt and no liabilities, and also has $1 million in cash and equivalents on its balance sheet. Now further imagine that the company is at least breaking even in terms of earnings. Would you pay $0.50/share for an asset that has a value of at least $1.00?
Now the answer is not as straightforward since one needs to determine what catalyst would bring the price closer to $1.00. If the company decides to spend the cash on an ill-fated venture, then the value of the stock would drop. However if the company decides to liquidate or pay a special dividend to shareholders, then the stock should be worth more than $0.50/share.
Most recently I have seen several small cap companies announcing a special dividend:
Back on March 16, FortuNet (FNET) announced that it would ask shareholders to approve a special $2.50 cash dividend on its April 17 meeting. As a result the stock price rallied 75.2% in a single day to $2.40/share. FNET earned $0.25/share in 2008 and has almost $2.75/share in total cash and investment securities as of 12/31/2008.
Back on December 5 Eden bioscience (EDEN) announced it would be winding down its operations. The stock rallied 77% on the news. The company had $1.80/share in cash. A potential issue is that winding down operations could cost money.
A company I am currently looking at from a value-investing standpoint is TheStreet.com (TSCM). Currently the online stock market content provider has $72.4 million in its coffers, versus total liabilities of $19 million, for a net $53.4 million or $1.76/share in cash. I like the fact that TSCM is paying out a quarterly dividend of $0.025/share. I would be interested in TSCM on dips below $1.50.
This post was featured on 138th Edition of the Festival of Stocks
Relevant Articles:
- 40 Value Stocks that Graham Would Buy
- Average Durations of Previous Bear Markets
- The Dividend Edge
- Why dividends matter?
Popular Posts
-
I review dividends increases every week, as part of my monitoring process. I typically focus my attention to companies that have raised divi...
-
Today, I wanted to share the story of Earl Crawley , a parking lot attendant who accumulated a portfolio of dividend stocks worth $500,000, ...
-
Do you ever wonder how your net worth compares to others in your age group? Do you ever wonder if you are ahead or behind? Do you also ever ...
-
I review the list of dividend increases every week as part of my monitoring process. This exercise helps me stay in shape, and abreast on wh...
-
Bill Gates is one of the founders of software giant Microsoft (MSFT). Before Microsoft went public in 1986, he held 11,222,000 shares in th...
-
I am a big fan of Warren Buffett, the Oracle of Omaha. His letters to shareholders are an excellent resource for students of value investing...
-
I review the list of dividend increases each week, as part of my monitoring process . I follow this process in order to monitor existing in...
-
I review the list of dividend increases every week, in an effort to monitor the dividend growth investing universe. This exercise helps me r...
-
In my investing, look for businesses I can understand that have some sort of a competitive advantage that translates into consistent earn...
-
The NASDAQ US Broad Dividend Achievers Select Index is comprised of a select group of securities with at least ten consecutive years of incr...
