Adding New Names to the Wish List

 | Dec 21, 2011 | 4:00 PM EST  | Comments
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WINN FRPT

Today I want to add some new names to our Christmas list. I am focusing on cash rich companies that trade for less than their tangible book value. This has been one of the most successful approaches to investing this year and I expect this will continue in 2012 and beyond. In the last couple of month's two stocks, Winn Dixie (WINN) and Force Protection (FRPT), off our cash rich cheap sock list have seen takeover offers at substantial premiums to the prevailing market price. Cash rich companies have always been takeover bait and I think they always will be.

Many people say that the hardest market decision an investor faces is not when to buy but when to sell -- and a takeover offer makes the decision for you. In addition to the upside potential, the cash on the balance sheet provides a margin of safety and can act as a floor under the stock price.

The first stock on my list is one I initially purchased earlier this year. Tellabs (TLAB) is a former darling stock that has fallen on hard times and its price reflects this. The communication equipment company trades at 85% of tangible book value and at a small premium to the cash on the balance sheet. Sales are on the decline as a result of increasing competition -- particularly for its largest customer -- and Tellabs is still in the early stages of expanding overseas to regain revenue growth. The company is also cutting expenses. Which this should allow it to regain positive cash flow early next year. The company has $1.1 billion of cash on hand and no debt and the total market cap of the company is just $.1.4 billion. The cash can be used to make acquisitions and buy back stock below tangible book value, both of which should be good for the long-term direction of the stock price. Tellabs is not a particularly pretty stock, but it is safe and cheap.

The same can be said about venture capital firm Safeguard Scientific (SFE). The company has seen its stock price fall by about one-third this year. The company invests in life sciences and technology companies and has plenty of cash to put to work right now. The firm has investments in 13 companies right now worth about $167 million and cash on hand of roughly $253 million. This adds up to $19 a share with more than $12 a share in cash. The current stock price of $15 does not seem to reflect the company's strong balance-sheet position. In addition to look for opportunities to put their cash to work Safeguard is currently buying back stock in the open market.

Targacept (TRGT) is a biotech company whose stock has fallen sharply in recent weeks as the trials of their depression drug fell short of its goal in Phase III clinical trials. The drug is a joint venture with Astra Zeneca (AZN)and the disappointing trials represent a major setback for the company. As a result of the decline the stock currently trade below the cash on the balance sheet and at least one noted value investor took note. Seth Klarman of Baupost apparently think the company still has upside potential as he recently purchased almost 17% of the company. Targacept has said it will push forward testing its depression drug and that it has several other drugs currently in research and trial phases as well. I am normally very skeptical of net-cash biotech stocks, but Klarman's purchase intrigues me and I plan to dig further into this company.

Net-cash stocks can be the Christmas gift that keeps on giving. As we saw with several net cash names this year, these names are often what I have heard Louis Navellier refer to as bunny stocks. They sit still for long periods of time and then leap forward in brief but spectacular spurts when approached by a predator. Boring stocks that lead to profits could be just the prescription for these volatile markets.

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