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Four Free Stocks: TakeBy Rob Fannon, editor Phase 1 InvestorFriday, November 14, 2008 Logic and common sense no longer apply.
Hedge funds with massive redemption calls and mutual funds with dwindling assets are selling hand over fist – regardless of price – to raise cash. The selling pressure is still in full force this month. And we can't know when it'll stop.
But here's the good news: This distorted market is giving us a once-in-a-lifetime opportunity.
Take PDI Inc (PDII) for example. PDI provides temporary sales reps to the drug industry. The company pioneered the business model and is one of the industry's top players. It has absolutely no debt. But at a measly $3.70 per share, PDI now trades 50% below the amount of cash on its books.
With a miniscule cash burn and a service that's absolutely critical to Big Pharma's future, PDI simply cannot go bankrupt over the next five years. Still, that's exactly how the market is valuing the stock today. It's completely ridiculous.
My focus is the biotech market. And it's not uncommon for biotech stocks to trade at or below net cash (cash – debt), especially after a clinical setback. So part of what I do is dig around for biotech gems that have been tossed in the trash.
But in today's market, it's incredibly easy to find profitable, debt-free companies in just about every sector, selling for about as much cash as they've got on the books. Here are a few that turned up recently...
Syneron makes machines for laser-based facelifts, liposuction, and the like. The stock is trading around $8 per share, just about the amount of cash on the books. In other words, investors are paying for the cash and valuing the business at zero. Sure, in times of economic stress, people may cut back on cosmetic surgeries. But I think it's a safe bet that a recession won't completely eliminate vanity, especially among the wealthy. So here we have a long-term growth trend intact and a market leader trading as if the business is worthless.
Electro Scientific sells high-tech machines to optimize manufacturing in the semiconductor industry. Consumers are buying fewer computers, and semiconductor bellwether Intel isn't going to make as much money this year as it thought. But over the long term, the world will continue its love affair with gadgets. Electro Scientific's technical prowess, plus its huge cash hoard, will certainly help it weather the current economic storm.
Finally, KHD Humboldt is a favorite stock of my colleague Dan Ferris, editor of Extreme Value. KHD provides engineering services and equipment for plants that process cement, coal, and minerals. It has operations in Asia, Europe, the Middle East, Australia, Africa, and the United States. This week, the company hinted at a rough fourth quarter. The stock dropped 38% in one day. Now, you can pay $0.65 for $1 in cash, plus get the underlying business free. The market seems to believe KHD will lose $100 million next year and never become profitable again. I disagree.
Back in the 2002-03 bear market, KHD traded down to less than cash. It was holding about $4.50 per share, and trading for around $3.50. Over the next year, the stock tripled... Through the 2007 peak, shares were up over tenfold.
By buying good business for less than or close to cash on the books, we can generate extraordinary returns in the next few years – even if near-term volatility persists.
This list is just a sampling of dirt-cheap stocks. I hope you have the courage to scoop up the highest-quality names for just about nothing while the opportunity lasts. Stick with profitable market leaders with high cash and low debt. In a few years, you'll be happy you acted now.
Good investing,
Rob
Further Reading:
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Private equity behemoth Blackstone Group hits all-time low... down 78% from 2007 IPO.
Technology gets crushed... Microsoft, Intel, Cisco, Hewlett-Packard, IBM, Google, Dell, Corning, Research in Motion, QUALCOMM, and Nokia hit new lows.
Oil sands blue chip Suncor down 72% since May... at a three-year low.
Newspaper giants continue slide... New York Times and Gannett (USA Today) hit multiyear lows.
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