Negative Enterprise Value Stocks Outperform:Up 103.98%

May 25, 2009 | Comments (6)

Two months ago, I put up a list of negative enterprise value stocks that I ran from the Yahoo screen in order to test how the strategy would perform when net nets disappear.

No I didn’t make over 100% over a short period of time but I hope I did grab your attention.

Two months ago, I performed a negative enterprise value search and wrote up the results. I admit two months is certainly not a good indicator of performance and I’m probably getting ahead of myself but the list has performed incredibly well. They were random picks without any research but were businesses I knew about. The negative enterprise stocks have gone up 103.98% during the last two months.

These cheap undervalued stocks were listed just before the overaused usedll market went up so expecting the same type of results will be wishful thinking. But it does indicate how negative enterprise value stocks would perform.

Previous Cheap Stocks Results

  • Tuesday Morning (TUES): UP 523.81%
  • Global Sources (GSOL): UP 69.75%
  • Horsehead Holding (ZINC): UP 65.16%
  • Heidrick & Struggles International Inc (HSII): UP 34.22%
  • Tandy Leather Factory (TLF): UP 27.37%
  • Build a Bear Workshop (BBW): UP 10.46%
  • DIVX Inc (DIVX): DOWN 2.91%
  • S&P average: UP 23%

I was surprised at how TUES recovered and topped the list. I’m sure there must be similar contrarian businesses out there.

Well let’s go fishing again and see what we catch this time.

Screen Settings

The screen criterias are:

  • Enterprise value <= 25m
  • Enterprise value/Revenue <= 1
  • ROE >= 0

Negative Enterprise Value Stocks

QLT Inc. (QLTI)

QLTI is a Chinese company was mentioned quickly in the article where I went through 100 net nets with the investment spreadsheet. Their latest quarterly reports reveal that a significant amount of cash and receivables disappeared. Although QLTI is no longer a net net, it is still in negative enterprise value territory.

Prices as of May 25

  • Current Price: $2.34
  • Cash per share: $2.37

Comments: QLTI is trading at a cheap price but they been involved in a couple of expensive litigations and probably more in the future. This only means more cash thrown at legal fees and charges. Won’t be adding this one on my list.

Man Sang Holdings Inc (MHJ)

Another Chinese, Hong Kong to be correct, company. The cheap stocks list seems be filled with Asian companies lately. I wonder why that is… ??

Man Sang Holdings, Inc. is principally engaged in the purchasing, processing, assembling, merchandising, and wholesale distribution of pearls, pearl jewelry products and jewelry products. In addition, the Company owns and operates a commercial real estate complex in Shenzhen, the People’s Republic of China. The Company offers six product lines: Freshwater pearls; Chinese / Japanese cultured pearls; South Sea pearls and Tahitian pearls; Pearl jewelry, and Other jewelry products.

  • Current Price: $2.30
  • Cash per share: $10.19

Comments: MHJ is currently trading at a HUGE discount to the amount of cash it is holding. In terms of revenues, it has been positive for the 9 out of 10 years and the important free cash flow has also been positive except 1999 and 2008. Last year MHJ used up $13.1 million in FCF where $60.7mil was used in capital expenditures. Considering their average capex has been around $1 mil for the past 9 years, if the $60.7m is a one time occurence for future growth, MHJ may be a very very ver interesting prospect.

On paper MHJ has a liability of $171m but upon a deeper probe, it turns out that $79m is from a “Minority interest”. Minority interest is defined as

“A non-current liability that can be found on a parent company’s balance sheet that represents the proportion of its subsidiaries owned by minority shareholders.

If ABC Corp. owns 90% of XYZ inc, which is a $100 million company, on ABC Corp.’s balance sheet, there would be a $10 million liability in minority interest account to represent the 10% of XYZ Inc. that ABC Corp does not own.”

I haven’t gone through the previous statements but it seems like MHJ has quite number of payables and loans it needs to pay off.

Avalon Holdings Corporation (AWX)

Avalon Holdings Corporation (Avalon) is a subsidiary of American Waste Services, Inc. (AWS). Avalon’s business segments are waste management services, and golf and related operations. The waste management services segment includes waste disposal brokerage and management services, and captive landfill management operations. The golf and related operations segment includes the operation and management of golf courses, fitness centers, dining and banquet facilities, and a travel agency.

  • Current Price: $2.30
  • Cash per share: $1.4

Comments: Capital intensive business with extremely tight margins. Safe to say that the margin of safety has probably eroded but waste management is always a business with a moat. Only problem with AWX is that it loses money in the process.

As a going concern, AWX looks to be worth around the $5 mark with a high level of uncertainty.

Mastech Holdings (MHH)

Mastech Holdings, Inc. (Mastech) is a provider of information technology (IT), brokerage operations staffing, and consulting services. It operates five Global Recruiting Centers located in the United States, Asia, and Europe that deliver a range of recruiting and sourcing services.

  • Current Price: $3.09
  • Cash per share: $1.56

Comments: Just found out MHH was a spin off from iGATE in Sep of 2008. It was spun off at a price of $9.75 and then plunged to $1.10 within a month as everyone sold off. Will definitely look more into this one

Had a huge run up in price after its first quarter announcement but there may be more value remaining.

Additional Comments

Although there were some more interesting names, many of the larger cap companies have now disappeared from 2 months ago. Who knows where the markets are headed, but it’s always best to scoop up the bargains while they exist and buy more if it gets cheapers.

Disclosure

No positions held at time of writing.

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

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  • derek

    How did you determine that QLTI is Chinese? Its based in a populated part of Canada where the majority is Asian, but thats about it.

  • http://www.oldschoolvalue.com Jae Jun

    Thanks for pointing that out. I’m not sure why I said it was Chinese. I’m getting confused with all these other Chinese net nets I’ve been looking at.

    Edited.

  • Dom

    Don’t have time to verify this now, but somehow I remember the Yahoo market value for MHJ is wrong, due to the fact that 1 MHJ share = x shares in Hong Kong (symbol 0938).In fact, the market value of 0938 is HK$489.9 million. http://www.aastocks.com/en/stock/basicquote.aspx?symbol=00938

    Perhaps you want to double check this before diving in.

  • http://www.oldschoolvalue.com Jae Jun

    Will be looking at MHH first since it is a spinoff, is profitable, has a long operational history before the spinoff and looks to be dirt cheap.

    Lots to read up on. Will write a full valuation on MHH when I can.

  • Yash

    Any thoughts on PRGN? It looks cheap at a price of 5.45

  • http://www.oldschoolvalue.com Jae Jun

    Hi Yash,

    I really cant say much about PRGN as shipping is a little beyond my circle of competence. I do know that with shipping companies, it’s important to check their cash flows and whether they can meet debt payments, if they have any, as well as the locked in backorder or contract percentage (cant remember the proper term).

    Since I don’t know enough on PRGN to provide an intellectual answer, I’ll just have to skip on this one.

    Thanks for the idea.

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