In this volatile environment, the smaller names are more likely to bear the brunt of any market downside. We see it every day that the market hiccups. This is nothing new; the smaller and more speculative the company, the quicker it is dumped by nervous investors. With relatively smaller floats and less liquidity, this can create some wild price swings, and opportunities for those with strong stomachs. But I'm not sure there are many of those out there these days.
Cash is once again king -- or it seemed as though sentiment was headed that way. Investors should have some dry powder at this point. I have a different spin on that notion, and it involves the companies themselves having dry powder.
For years I've screened for small names that not only have ample cash, but that also trade at reasonable PE multiples, low levels of price to book, and also have limited leverage. These attributes can help create a theoretical floor in the stock price; theoretical, because the market is far from rational and ignores what it wants to. Nonetheless,I am interested to see how these names hold up in this environment.
Here are the specific screening criteria:
- Market capitalization between $100 million and $3 billion;
- Price-to-earnings ratio of less than 15;
- Long-term debt-to-equity ratio of less than 50%;
- Profitable during the trailing 12 months and in the latest fiscal year;
- Cash in excess of 20% of market cap;
- Price-to-book ratio of less than 1;
- Quick ratio greater than 1;
- Any sector except for the financial space.
It's a relatively small list of just 10 names at this point, but I'd expect it to grow if the current market volatility persists.
There are some familiar names, to me anyway; two of them, AVX Corp (AVX) and Benchmark Electronics (BHE) are showing up on more than one of the screens I routinely utilize. TravelCenters of America (TA) has been a favorite of some Real Money contributors over the years, including Tim Melvin.
The biggest name making the cut is wireless provider United States Cellular (USM). This is not my usual cup of tea, for sure, especially given the incredibly competitive nature of the industry. USM trades at 13x trailing earnings and 0.83x book value per share, although there are significant intangible assets. The company ended last quarter with nearly $600 million, or $7.00 per share in cash and $1.15 billion in debt.
Other qualifiers with market caps in excess of $1 billion include education name DeVry (DV) and diversified electronics company Sanmina (SANM), which trades below tangible book value per share, and has more than $5 per share in cash on the books. This is a fairly new name to me, but one in which I will be digging deeper into this weekend.
Rounding off the list are transportation company ArcBest (ARCB), which has more than $10 per share in cash and short-term investments, Tropicana Entertainment (TPCA), Multi-Fineline Electronix (MFLX), and Hurco (HURC).
As with all of the screens I utilize, keep in mind that this is simply an attempt to identify potentially interesting opportunities, as well as determine whether particular screening criteria have merit vs. the broader markets. For the latter, I will provide periodic updates of performance, lumps and all.
