Cash-Rich Small Caps

By Sham Gad | January 12, 2012 AAA

Small caps can be fertile hunting ground for the majority of individual investors. Many mutual funds and hedge funds need bigger, more liquid positions to trade in and out of. The result is many stocks that fly below the radar. Taking the search one step further, small caps with a cash-rich balance sheet can offer both protection and a chance to benefit from a once-unnoticed stock getting attention. (For related reading, see An Introduction To Small Cap Stocks.)

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Ripe for the Picking
Superior Industries (NYSE:SUP) designs and manufactures aluminum wheels for cars and light trucks. Boring as the business may sound, Superior Industries enjoys attractive rates of return. Return on equity (ROE) consistently exceeds 10% and profit margins approximately 6%, respectively. The company trades for around $17 per share or a market cap of around $467 million. The balance sheet is debt-free with over $150 million, or $5.60 per share in cash.

Rimage Corporation (Nasdaq:RIMG) makes systems that allow for the digital recording of CDs and DVDs. In addition to the systems, Rimage makes and sells blank recordable CDs, DVDs and other forms of digital media. Today, investors can get this business for next to nothing. The market cap is about $125 million and the company has around $115 million in cash and no debt. Book value per share exceeds the stock price and the company is profitable. (To learn more, read Digging Into Book Value.)

Looking to the Far East
While Chinese small caps have come under intense pressure due to concern over the legitimacy of the businesses, it's unlikely that all of these apples are rotten. While investors should clearly exercise caution inviting in Chinese small caps, today's current valuation warrants a closer look. China Marine Food (AMEX:CMFO) sells marine snack foods and energy drinks in China. The business is legitimate, but thanks to the disaster in Japan, consumers have become frightened of eating seafood caught from nearby waters. Such fears won't last forever. China Marine currently trades for around $1.37 against book value of over $4. The company has over $1 in totaly cash per share on the balance sheet and the business trades for less than two times its earnings.

China Xiniya Fashion (NYSE:XNY) designs and sells men's business apparel. Shares trade for about $1.96 each, or a market cap of just under $114 million. The balance sheet indicates no debt and over $140 million in cash, implying that the business is almost being given away.

The Bottom Line
Whether they end up being attractive investments or not, cash-rich small caps are always worth a closer look. Investing successfully in this arena often yields returns that vastly outperform the overall market rate of return. But investors will need to put in the work to make sure the company is a bargain and not a value trap. (For more information, read The Value Investor's Handbook.)

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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