These Stocks Are So Cheap, They're Free
By Jeff Clark
October 16, 2008

Severe declines create bargains in the stock market. We all know this. And there are buckets of bargains in this market. We all know that, too.

The problem, of course, is today's bargains are tomorrow's cheaper bargains. Intel (INTC) was cheap last Thursday, when it fell below $16 per share – its lowest price in nearly six years.It's cheaper today below $15.

Rowan Companies (RDC), which provides contract drilling services, was a bargain last week when it traded for just five times earnings. Today, RDC is a bigger bargain at four times earnings.

I could go on, but I suspect you get my point. Cheap stocks can get cheaper.

It's really just a matter of perception. Just a few months ago, investors were happy to pay 17 times earnings to own a piece of Intel. Today, they're rushing to sell the stock at 13 times earnings.

So valuation, like beauty, is in the eye of the beholder. It's subjective. I think INTC and RDC are cheap stocks, but you might disagree. And there's no way either of us can be mathematically certain of our opinion.

There is, however, one group of stocks that is cheap, no matter your definition of the word. I call them "free stocks." They are profitable companies whose shares trade below the value of debt-free cash on the balance sheet.

Think about it.

Imagine if Intel had $15 in cash per share on its balance sheet. Investors could buy one share of stock for $14.99 – yesterday's closing price, own $15 in cash per share, and get the rest of the company thrown in for free.

Of course, Intel doesn't have $15 in cash per share. It has $1.49. So we'll need to see one heck of a decline before Intel qualifies as a "free stock."

There are, however, a number of companies that do qualify as "free."

Take, for example, Actions Semiconductor (ACTS), a Chinese semiconductor manufacturer. ACTS closed yesterday at $2.03 per share, but it has $2.98 per share in cash on its balance sheet. The company has no debt, and it has been profitable for each of the past 16 quarters. So its cash hoard increases every quarter.

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ACTS trades at just over three times earnings – an arguably cheap valuation. And with the stock trading at a 30% discount to the amount of cash in the corporate coffers, investors can buy a share for just over $2, get nearly $3 in cash, and buy the rest of the company for nothing.

ACTS isn't just a cheap stock. It's free.

And there are buckets more just like it.

Best regards and good trading,

Mutual Fund Investors Flee in Record Numbers
US investors pulled a record $65bn out of mutual funds in the week to last Friday, as their losses mounted from failing stock and bond markets.

Two-thirds of the money was drawn from equity funds, which saw outflows of close to $9bn on Friday alone. Equity funds have had outflows of $56bn during October so far – the largest monthly drop since records began almost 20 years ago, according to TrimTabs, which tracks fund flows.
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