Long Shot: Cash Is King

 | Jan 23, 2013 | 10:30 AM EST
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Real Money's Long Shot column is dedicated to trading ideas that are highly risky, but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.

In a recent "Long Shot" post, I pointed out a promising name trading below cash value but poised to soar if a new business model eliminates cash burn. Because UTStarcom (UTSI) is a Chinese company, no one believes its numbers (and Tuesday's Caterpillar (CAT) news does nothing to burnish the reputation of Chinese companies), but I suspect UTSI is for real, and if new management pursues a new strategy to return cash flow to breakeven, the stock will move. Stocks trading below cash value are a great place to troll for trading ideas. The market is telling you they are going out of business, so the slightest whiff of success can send shares soaring.

I expanded on this idea Tuesday in Real Money Pro's "Daily Diary," and I wanted to share the love with Real Money subscribers. These companies have market caps that are less than cash on their balance sheets, net of all debt. I screened for a minimum $50 million cap to remove the tiny "junk" names and kept the focus on real companies. The especially interesting ones were those with the prospect of not burning through cash, so I included the most recent quarter's operating cash flow.

Some names would be better served closing their doors and paying back shareholders. For instance, Sycamore Networks (SCMR) has a huge cash hoard that should be returned. Imation (IMN) is in the middle of a "strategic transformation" but could plausibly go to breakeven cash flow in the near term. Tellabs (TLAB) is a head fake in this table, since it will be paying a $367 million special dividend soon -- a lesson to do the research and not just rely on the initial screen for names.

As always, don't buy these based on a screen alone; use this as a starting point to find names poised for a quick move as the market recognizes going-concern value.

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