Two Cheap Real Estate Bets

• ByTim Melvin, RealMoney.com Contributor
• On 9:45 am EDT, Tuesday October 13, 2009

As I was running my screen for stocks that trade below tangible book value and that boast a very high cash ratio yesterday, I came across a couple of intriguing names. The ratio of cash to current bills being high tells me that these companies have the money in the bank to keep the bills paid and the doors open. It was a pretty short list as the cheap part of safe and cheap has been diminished by the powerful rally in the stock market.

A lot of my old favorites are still on the list. American National Insurance has rebounded impressively from the lows earlier this year, but the stock is still cheap at just 70% of tangible book value. The company has a cash ratio of 15, so it should not have a problem with current expenses or liabilities. Actions Semiconductor is on the list and still trades below cash and is a "too cheap not to own" stock. Care Investment Trust is also on my list and is still at just 70% of tangible book and has a cash ratio of almost 6. I own all of these and would buy them if I was starting a portfolio from scratch today.

Two companies popped up that surprised me a little. Both operate in the worst possible industry right now -- namely, real estate -- which is also not an industry group that I think will see a rebound of any size or strength anytime soon. One is primarily residential, and the other is in the commercial space. Both of these areas have been devastated, but these two companies have done a good job of managing through this crisis.

Just the description alone of Avatar Holdings is enough to send shivers up the spine. The company is in the residential real estate business in Florida and Arizona. These are the worst locations in the country to be in the worst business. Most of its activity is in Florida, ground zero for the real estate market. The company builds lifestyle communities, with a focus on the active adult and primary residential communities.

Avatar has cut back on development activity and is focusing on monetizing the inventory and reinforcing the balance sheet. Management is positioning the company to build homes with fewer amenities and lower price points when the market begins to recover. The company recently completed a stock offering of 1.6 million shares. After the offering, Avatar has more than $200 million in cash compared to $118 million of debt. The cash ratio is 17, so although the company may struggle, it will probably survive.

In the prospectus for the recent offering, management indicated that the money would be used for general purposes, including acquisitions of property and other real estate-related assets. The prospectus states that management has seen very few properties so far that represent attractive opportunities but believes that we are approaching a window where the company can acquire property at a large discount to intrinsic value. Avatar is not new to the game, having been in business since 1970. The company has operated and benefitted from prior real estate meltdowns, and I tend to think that it will do so again.

The stock is cheap. At 40% of tangible book value and plenty of cash, it becomes an interesting speculation in Florida real estate. The state has been hammered by falling real estate, and it may take years to come back. It is worth keeping in mind that historically Florida does boom once a recovery begins. The warm weather and beaches will always make it a desirable place to live. It may be a bumpy ride for the next year or two, but the value is there, and I think that the company can survive and thrive in a recovery.

Resource Capital is in the far dicier commercial real estate market. The company operates as a specialty finance business. It makes everything from first mortgage loans to mezzanine financings. The company also has investments in commercial real estate and finances trust-preferred and asset-backed securities. The company is focusing on managing its portfolios though the crisis, deleveraging them and building cash balances.

Management has used some of the cash to buy back debt for less than the face value in recent months. The company is struggling but has managed to stay profitable on an operating basis.

The stock is cheap at 80% of tangible book value and a cash ratio over 20. For now, Resource Capital is still paying a 30-cents-a-share quarterly dividend. I would move slowly with this one, but as the problems work through the commercial real estate market, it will become an interesting way to play the recovery.

Looking for stocks below book value with sufficient cash to keep the bills paid has uncovered some profitable opportunities over the years. These two have some bumps ahead of them from the continued weakness in both commercial and residential real estate, but the long-term recovery potential is attractive.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Actions Semiconductor, Avatar Holdings and Resource Capital 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!