2 Value Plays that Look Promising

 | Jan 27, 2016 | 2:00 PM EST
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While the S&P 500 has gotten a 7% haircut so far this year, small-cap firms, companies in out-of-favor industries and businesses that have been subject to any negative news have really been through the ringer.

Here are two names to consider among the underbelly of companies that are trading below net current asset value:

Skullcandy (SKUL)
Headphone distributor Skullcandy has really had its head handed to itself in a basket (pun intended). The stock is down some 34% year to date, as well as around 72% since last May. That drubbing has left SKUL trading at just 0.77x net current asset value.

Recent damage stemmed from lower guidance for upcoming fourth-quarter results. Analysts' consensus had been called for 40 cents in earnings per share, but the company now pegs that at between 25 and 27 cents. Management's original projections of 5% to 7% in quarterly sales growth evidently didn't materialize, and sales might end up pretty close to flat instead.

SKUL has no debt and about $14 million cash on the books, although that's down from about $40 million from last year. The cash burn is a concern, and we'll have to see how much free cash flow (if any) the company generated during the fourth quarter.

Skullcandy doesn't appear expensive from a price-to-earnings perspective, with a trailing P/E of 12. However, paying too much attention to that is like driving a car while only looking in the rearview mirror. The key question is whether the fourth quarter was just a worse-than-expected period or a sign of a more-systemic problem at the company.

CDI Corp. (CDI)
This stock has gotten hammered due to its oil-and-gas-industry staffing business, but made an interesting move yesterday. CDI eliminated its dividend (which had a nearly 11% indicated yield) and initiated a $20 million share buyback instead.

That's a bold move. If CDI follows through with the buyback, that could send a strong signal to the market that the company's business is improving. It would also show that management believes CDI's shares are cheap and that executives have the confidence to prove it.

It'll be interesting to see if (and when) CDI puts its own "dry powder" to work. In the meantime, the dividend's elimination shouldn't come as much of a surprise to investors, as CDI has been in the red for three out of the past four quarters.

Shares currently trade at just 0.58x net current asset value, while the stock is also a pick of my fellow RealMoney columnist (and value curmudgeon) Tim Melvin. That's my second shout-out to Tim this week, but I understand that he recently quit smoking and deserves some acknowledgement!

Remember to Be Patient
The market "crash" that many have feared has already happened for some individual stocks. That means it's a good time to have some "dry powder," but remember that patience is just as important for value investors.

By patience, I'm not referring to holding on to a value stock for several years while its turnaround story plays out. Instead, I'm talking about not being too fast on the trigger when buying a new position.

This is the type of market where "cheap" can get cheaper in the blink of an eye. If you like an ugly, distressed stock at $10 a share, chances are you'll like it even more at $8 a share.

As a deep-value hunter, it's refreshing to me to see the cupboards starting to get restocked. But I suspect that we'll see a great deal more value plays as 2016 unfolds.

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