I wanted to find five stocks that fit the Graham & Dodd definition of bargains. These stocks to buy tend to do well coming out of market downturns.
Professors Benjamin Graham and David Dodd of the Columbia Business School wrote Securities Analysis in 1934. It was right after an excruciating market downturn. The book, along with Graham’s The Intelligent Investor in 1949, became the basis of value investing.
One of the central tenants of their book is to find stocks where net current assets, after subtracting debt, represent over 100% of the market value of a stock. I decided to simplify this a bit. I wanted to find stocks where net cash represents a large portion of the market value.
So, I found five stocks where the amount of cash on the balance sheet, after deducting all interest-bearing debt, is high. It represents a large portion of the market value of a stock. These five stocks represent bargains.
The following five stocks have net cash (after all debt) representing over 40% of their market value. The stocks are:
- Cookpad (OTCMKTS:CPADF)
- Voxx International (NASDAQ:VOXX)
- Hudson Global (NASDAQ:HSON)
- Oxbridge Re Holdings (NASDAQ:OXBR)
- NortonLifeLock (NASDAQ:NLOK)
Most of these stocks have net cash representing over two-thirds of their market value. That means they are almost selling for their liquidation value. Let’s look at them more carefully.
Stocks to Buy: Cookpad (CPADF)
Cookpad is a Tokyo-based company that provides online recipe sharing and searching services. It makes money by selling advertising spots. Cookpad has over $190 million in net cash, but its market value is just $244 million.
As a result, net cash represents an astounding 74% of its market value. Another way to understand this is that CPADF has $1.77 per share of net cash. But the stock price is $2.40 per share.
It is not uncommon for Japanese stocks to have large amounts of net cash. However, some of these companies do not act in ways that benefit shareholders.
But in this case, cash represents a very high percentage of the market value. Over time the stock should begin to reflect the company’s underlying value.
For example, in 2019, Cookpad made $2.5 million on $108 million in gross sales. At two times sales, the business would be worth over $216 million, or $2 per share. In addition, Cookpad has $1.77 in net cash per share. So, CPADF stock, at $2.40 per share is very undervalued.
Voxx International (VOXX)
The next company on this list of stocks to buy is Voxx International. Voxx makes auto and in-home speakers and a whole host of accessory products. It has $41 million in net cash and securities but its market value is $94 million.
In other words, net cash represents almost 44% of the market value for VOXX stock.
Another way to understand this is to estimate the value of VOXX’s business. Last year the company lost $9.7 million on sales of $401 million. At 25% of sales, the business would be worth roughly $100 million. Add in the $41 million in net cash, and the total is $141 million.
Guess what, the market cap for VOXX stock is just $94 million. So the stock is worth at least $50 million more than its present price. It’s worth 50% more than the present price.
And if the valuation for the business is worth more than 25% of sales, the stock is even more undervalued. Why would that be? It is always possible new management could come in to make the company profitable.
There are plenty of activist hedge funds who like to prey on high net cash stocks like this. Look for interesting things to happen with Voxx International.
Hudson Global (HSON)
Hudson Global is a recruitment company for large corporations. It has $21 million in net cash after long-term debt. But its market value is $27 million. So its net cash represents 76% of the stock market value.
HSON lost about $1 million last year on sales of $94 million. During Q4 it made $1.5 million on sales of $25.4 million. So on a run-rate basis, the company will make $6 million on $102 million in sales.
Therefore, the value of the business might be expected to fetch say $50 million to $60 million at 10 times earnings and 50% to 60% of sales. But, if you add back the $21 million in net cash, the total value would be as much as $80 million.
That means that the stock is worth 3 to 4 times its present price at $27 million. In fact, even if we halved the value of the business to $25 million to $30 million, HSON stock would still be worth double the present price.
So this high net cash stock is worth substantially more than its present price.
Oxbridge Re Holdings (OXBR)
Oxbridge Re is a property and casualty reinsurance company based in the Cayman Islands. It provides collateralized reinsurance contracts primarily for property and casualty insurance companies in the Gulf Coast region of the U.S.
Net cash represents 69% of its $5 million market value. The business lost $4.4 million in cash flow from operations on $1 million of sales last year. To be honest, it’s kind of hard to value this business.
I suspect that given its large net cash business it is worth more than its present price. That is partly based on the belief that it would probably cost more than $1.5 million just to replicate its administrative operations and sales contacts. This is the difference between the market value and its net cash balance.
NortonLifeLock is a cybersecurity software and identity theft protection company based in Tempe, Arizona. Its market value is $11.6 billion, but NLOK also has $12.8 billion in cash and securities. After deducting long-term debt, its net cash is $8.3 billion. This represents an incredible 71% of its present market value, or $21.27 per share.
During the quarter ending Jan. 3, 2020, NLOK sold its Enterprise division for over $10 billion in proceeds. In January it paid out $12 per share in a special dividend.
After an additional asset sale this quarter, NLOK has $5.6 billion of gross cash and securities, or $9.27 per share. That represents 48% of its share price of $19.30. After debt, the net cash is $1.1 billion or over 9% of its market value.
NLOK also decided to implement a $1.6 billion share buyback program in August 2019. That represents another 13.8% of its market value that will be returned to shareholders.
So far, NLOK stock has shown that it is a very shareholder-friendly stock. Look for it and the rest of these stocks to buy to do well over the next year.