Filed Under: , ,
Tickers in this Article: ZRAN, DIVX, TRID, SIMG
On the whole, markets today are generally efficient when measured over a period of years or decades. Occasionally, human emotional behavior gets out of whack, leading to some very intriguing price inefficiencies. Case in point: October 2008 and March 2009, whereby many stock prices were based on a wave of forced selling and not long-term intrinsic value. (For more, see Sympathy Sell-Off: An Investor's Guide.)

IN PICTURES:
Eight Ways To Survive A Market Downturn

Almost Gone

For the most part, the easy money is squarely off the table. But there are areas of potential interest - namely those issues trading at or below net cash or significantly below book value. This creates one potential compelling catalyst - that a liquidation or distribution of the cash results in a tidy return to investors. Rule number one when playing in this space: pay very close attention to management. An asset rich company today could be a debt-ridden company tomorrow if management decides to spend that money on value destroying acquisitions.

Believe It or Not
Take a look at Silicon Image (Nasdaq:SIMG), a $160 million company with an enterprise value of $5.5 million. That translates into $2.03 per share in cash and book value of $3.10 against today's share price of $2.13. The company is suffering operationally, so that's a backdoor catalyst to liquidate and return cash to shareholders. Note the company has no plans to do this at the current time.

Trident Microsystems
(Nasdaq:TRID) is a $133 million market cap company with $187 million in cash and no debt. The shares trade for $1.88 and cash per share is $2.60. Several hedge funds own more than 5% positions in this company, meaning any one of them could easily stage an activist campaign. (For related reading, check out Spotting Cash Cows.)

Zoran
(Nasdaq:ZRAN) currently has a market cap of $458 million with $400 million in cash and no debt. That comes to $7.70 a share in cash and overall book value of $9 against a share price of $8.80. Zoran has actually performed relatively well recently, but the large cash pile looks very enticing. The company has not publicly stated any plans to dispense the cash to shareholders, but as long as it's not whittled away, it provides one lever of safety in the stock.

Media company DivX (Nasdaq:DIVX) trades for $4.84 a share, against book value of $5.40 and cash per share of $4.16. The company counts several investment funds as 5% holders.

The Bottom Line
A quality balance sheet offers a great margin of safety. However, it's the first margin of safety. The next moat comes in the form of solid long-term earnings growth, something missing from the above businesses. A strong balance sheet certainly provides a strong layer of protection, but it's not a guarantee that the stock price will go up. (For related reading, check out Cheap Stocks Or Value Traps? and Don't Get Burned By The Burn Rate.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center