Sizing Up These Small Caps

This list of small caps have been filtered by screening for certain characteristics. These characteristics are by no means any guarantee that the businesses are undervalued. But they do create a list that tends to produce bargain investment ideas. Screening for things like a low price to book ratio and little or no debt can often produce businesses that have temporarily fallen that can again rise. Such lists are also guaranteed to produce many value traps. The below list may either include diamonds in the rough or simply duds. In one way or another, the scree suggests that these stocks could be worth a second look.

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Fore!!
Adams Golf (Nasdaq:ADGF) is a well-respected brand of golf equipment and apparel on the PGA Tour. Legends like Tom Watson, winner of five British Opens, uses the Adams line of clubs. Unfortunately, the stock doesn't have the same respect by Mr. Market. As a result, the shares trade for around $3 against book value per share of over $6. The company has no debt and $1 per share in cash on the balance sheet. The problem is the company is not profitable today and sales have declined. But that's partly due to the slump in the golfing industry over the past several years. In 2007 Adams earned over $1 per share. An industry turnaround may be the catalyst for this company. (For further reading, check out Digging Into Book Value.)

Competitor Callaway Golf (NYSE:ELY) is a much bigger, and one of the most respected, golf companies in the world. It sponsors names like Phil Mickelson and Ernie Els. Callaway also has no net debt and trades for half of book value. Like Adams, 2009 was an unprofitable year, but Callaway's leading position in the industry is a huge plus.

Another Shot at Glory
Hurco (Nasdaq:HURC) is a maker of machine cutting tools and other control systems for industrial companies. The company has a market cap of $90 million and $30 million in net cash. The stock price is 80% of book value. The company lost $2 million in 2009 but earned over $20 million in both 2008 and 2009. If this merely a result of a cyclical downturn, then the company may be very attractive today. Finding Hurco led me to discover competitor Hardinge (Nasdaq:HDNG), which has a market cap of $100 million over $20 million in net cash. It trades at a greater discount to book value than Hurco. If anything, looking at competing companies that both look cheap may better reveal if there is indeed any value or no value at all.

The Bottom Line
The market is never short of investment ideas, the majority of which will not take long to determine that are not suitable value plays. But to find the gems you have to sift through the duds. (For more, see Value By The Book.)

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