Finding Stock Deals Amid the Wreckage

• ByTim Melvin, RealMoney.com Contributor
• On 7:45 am EST, Thursday February 12, 2009

"Send lawyers, guns and money." In addition to being one of my favorite tunes by the late Warren Zevon, this has been the typical government response to just about every problem.

In the current economic crisis, this approach is simply not going to work. There are no short-term fixes that will correct it. This problem took a decade to create, and it is not going away because of legislation or money-printing. The basic problem is simple: A stunning combination of poor lending practices, excessive securitization, poor government policy and simple greed created a bubble in real estate. We tied our entire economy to real estate prices. The bubble has popped. There are going to be more casualties.

The banking and investment industry has balance sheets littered with securities tied to real estate that have questionable value. The government is hoping distressed investors will help them purchase these assets. The investors I know, including myself, would be happy to help. You are really going to hate the prices we are willing to pay. No matter what your model or guess of the value is, the price I am willing to pay for toxic debt is a fraction of that.

The only real cure for this is for the institutions to be seized and the assets auctioned. Won't this hurt and mean that several of them no longer exist? It will, but not as much as the continued attempts to prop up what are basically failed banks. It would also speed the recovery process. Eliminate the garbage and allow the healthy banks to get back to business.

If I were running a bank like BB&T or M&T Bank, I would be furious. Both of these banks did business in a very traditional manner. They did not get overly involved in the more complex and risky areas of lending and investing. They have problems with real estate loans and commercial lending because of market declines and an economic slowdown. However, they are solvent and can likely withstand the crisis.

If Washington were not so focused on saving the giant banks that led the charge that got us into this mess, the more conservative banks would have filled the void and benefited from firming real estate values. As long as politicians try to solve the problem instead of letting the markets work, this is not going to happen

The good news is that because of the activity out of Washington, stock prices are being devastated. This is good because I am starting to see more companies trade at or near cash levels. Since my view of the market for the next few quarters is negative, I am hoping to see more stocks trade at this level. Buying stocks for less than cash on the books is my favorite way of investing. Nothing would make me happier, and in the long run wealthier, than owning a portfolio of dozens of companies like that.

One of my favorite cash stocks is one I wrote about last year. The stock has not done much over that time, but it has not gone down either. Hilltop Holdings is a holding company for billionaire distressed investor Gerald Ford. The company was recently part of an investor group that formed Ford Group Bank. The bank was given the first of a new type of bank charter created for private investors who wish to bid on troubled banks and bank assets. This is an area where Ford has substantial experience. He bought his first distressed bank in 1975. Hilltop now operates an insurance agency that sells homeowners insurance in the Southwest. Net cash is equal to the current share price.

Vital Images is also selling for less than the cash on the balance sheet. There is a drawback to this company, as it is losing money at the moment. However, the loss was about $4 million for the last year, and it has $156 million in cash. At this rate, it will be years before Vital burns through the cash. This gives the company time to grow its medical visualization software product. Its Vitrea software has applications in cardiology, oncology, surgery and other areas of medicine. Vital has a distribution and sales agreement with Toshiba, the Japanese computer company. Largely because of this, it has the largest installed base of medical visualization and analysis software, well ahead of competitors. The company is actively buying back stock as well.

As the market comes down, we will see more stocks that trade near or below cash. We have already seen Adaptec, Electro Scientific and Sycamore Networks trade below cash levels. When more companies trade to these levels, I will be buyers of them as well.

Buzz up!