There's an often-quoted line in investing and business: "Price is what you pay and value is what you get." In other words, price paid confers value gained. Another way to understand this idea is the saying that money is made or lost at the time you buy an asset, not when you sell it.
So when bottom-fishing for stocks, it's wise to keep the above concept in mind. Not everything that is cheaply priced will create value, and not everything that creates value will be cheaply priced. The most common mistake is to view price in relative terms: A share trading for $5 looks more attractive than a share trading for $50. Somehow owning 1,000 shares of a $5 stock seems like a better bargain than owning 100 shares of a $50 stock. Seemingly intelligent investors fall victim to this view -- a large pizza with 12 slices is more than a large pizza with eight slices.
So, even though I like to look at low-price stock lists, companies trading at 52-week lows or shares trading under $5, over the years I've evolved to make sure I don't fall into the low-price-equals-more-value trap. Indeed, there are low-price-tag ideas that turn into multibaggers, but there are others like ALCO Stores (ALCS) and RadioShack (RSH), both of which I thought were worth a closer look, that became wipeouts.
But I do think online media advertising solutions provider Sizmek (SZMK) is an example of a great opportunity to bottom fish. I've come to learn that balance sheets are vastly more important to smaller companies, and at Sizmek, the balance sheet is a beautiful sight. It's debt-free and holds $92 million in cash for a company with a market-cap of under $200 million.
Global Internet media company Travelzoo (TZOO) is also a fish scraping bottom that looks intriguing. Weak fourth-quarter results may mask a bigger opportunity here. You have a business being valued at $130 million with $50 million in cash, no debt and $10 million in tax liabilities. Gross margins are over 80%, so it's a business that needs to continue using its brand to scale. Any time you have a cash-rich company that requires little capital expenditure to run the business, a lot of really good things can happen.
So whether you are fishing for scavengers or trophies, it all comes down to what you are getting for the price you are paying. Let prices guide you, not instruct you.