Another Method for Finding Cheap Stocks

• ByTim Melvin, RealMoney.com Contributor
• On 3:00 pm EDT, Monday October 12, 2009

In spite of being cautious on the market right now, I never stop looking for cheap stocks. Sometimes I find one or two that are too cheap not to own, such as the two Chinese companies last week. It also allows me to build a list of companies in which I am interested and to determine what price I am willing to pay. I like to do the homework before the market creates a buying opportunity. This gives me time to read the filings and research reports to determine the value of a particular company without panic-buying.

I am always trying new screens to uncover ideas. One I tried over the weekend was a variation on one I have used before. I simply ran a screen for companies with market caps that were far in excess of their entity values. Since the entity value is market equity plus total debt minus cash, I thought that the screen might uncover some cash-rich, undervalued companies.

I knew I was on the right track when scanning the list. Pretty much all of my current "too cheap not to owns" such as Silicon Graphics and Actions Semiconductor showed up. In all, I got a list of 60 companies whose entity values were far less than their market caps.

WellCare Health is one of the more intriguing companies on the list. The managed care provider has had its problems with federal and state investigations over the past few years, but on the numbers, the stock is cheap. WellCare has a market cap of $1.1 billion and an entity value of just $79. With the stock trading right around $25, there is $24 a share in cash on the balance sheet. While the future may be cloudy as a result of the ongoing investigation, the company does have over 1.5 million subscribers in various government-run health plans. With most of the share price in cash, the risk of future reductions in premium is currently more than discounted in the price, in my opinion. Business is actually pretty good for the company right now, with both revenue and earnings rising in the second quarter. Once all the legal issues are behind it, the company could actually be a huge beneficiary of health-care reform if a public option is included.

Molina Healthcare is pretty much in the same business as WellCare. The company is well-financed as well, with almost $600 million in cash and just $156 million of debt on the balance sheet. Backing out the debt, net cash is a little over $17 a share compared to a current market price of $19.70. The company is growing as well, with premium growth estimated to be around 17% for 2009. Enrollments have better than doubled over the past five years as the company continues to expand.

Next we have Greenlight Capital , another intriguing company whose market value far exceeds its entity value. The Cayman Island-based reinsurance company's Chairman is hedge fund legend David Einhorn, and he is involved in the management of the investment accounts. Greenlight has a market cap of about $700 million and an entity value of just $34 million. According to company filings at the end of June, the total investment portfolio is $595 million with an additional $133 million in cash. Right now, the shares are at a slight premium to the tangible book value. If they were to fall back below it, I think I would have to join noted value investors such as Daniel Loeb and The Royce Funds in owning the stock.

Nam Tai Electronics is a near net cash stock that shows up on the list with a total market cap of $240 million and entity value of just $17 million. The company provides manufacturing and design services to the consumer electronics and mobile telecommunications industries. Both of these are areas with tremendous growth potential once the current global recession comes to an end. This is yet another China-based company with ties to mobile telecom that is trading around cash levels. The company trades at around $5.45 and has $5.18 a share in cash. The stock is trading at 80% of tangible book as well. Given my lack of familiarity with Chinese stocks, I am going to wait for the shares to fall below cash, but it is on my radar.

This screen turned out to be an excellent way to find cheap stocks with cash on the books. This is going to become a regular tool for me as I search for cheap stocks with a margin of safety. I do not have enough space to cover all 60 stocks that came up when I ran the screen, but there are some interesting names I will be writing about very soon.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Silicon Graphics, Actions Semiconductor and Nam Tai Electronics to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Buzz up!