Value investors are always looking for inefficiently priced stocks. Such stocks are often found among smaller cap issues, since these securities are not worth the time and the effort of analysts and institutions catering to billion dollar funds. Empirical evidence also supports the fact that small caps have the potential for greater returns, but outstanding returns only come to those willing to seek out value among the thousands of issues available.
Consider a stock such as Limco-Piedmont (LIMC), a maintenance, repair and parts and services supplier to the aviation industry. Limco trades for $30 million in the market, but consider the following balance sheet items:
Cash + Securities: $33 million
Accounts Receivable: $12 million
Inventory: $19 million
Total Liabilities: $10 million
With those balance sheet numbers, you would expect that the company is losing money hand over fist to have a market cap of just $30 million. But this is not the case. The company has contracts in place with several customers, including Fokker, KLM, Lufthansa, Boeing and Bombardier, resulting in a 4th quarter profit along with net income for 2008 of $2.7 million.
As an added incentive for investors, Limco is also the subject of a takeover offer which is 20% higher than its current price. A group of Limco’s investors are pushing for a higher takeover price, but even if the deal falls through, buyers at this price appear to be purchasing at a discount based on Limco’s cash position.
Rest assured, you will not find such a situation among well-followed large-cap stocks. It is near impossible to find a large company trading at a discount to its cash on hand, and if one can be found in such a state, you can rest assured it is because its debt load and negative earnings have the company in dire straights with doubts as to its future. Limco’s debt level: $0.
Disclosure: None
