Extreme Value Stocks: 1 of These Stocks Can make You Very Rich

4 Extreme Value Stocks for Your Portfolio

Choose your own metrics and run these stocks through your own diligence process. You will find that these stocks tick most of the boxes for undervaluation. This is one of the most stringent screens I run, with the following filters

  • P/E below 10
  • P/B below 1
  • Cash/Price > 1
  • 52 week price performance = bottom 20% of its industry

All these stocks sport a negative enterprise value.

Whether these stocks deserve your investment dollars or not depends on your review of these individual businesses, finding out why the stock is valued so low and determining the potential of quick value realization (which you can only do if you dig through the business fundamentals, including historical financial statements and management discussions).

Key Valuation Indicators as of Oct 8, 2012

Stock Company Market Value ($m) P/E (ttm) P/B Cash ($m) Debt ($m) Dividend Yield 52 wk price performance
PKBK Parke Bancorp 33.7 6.1 0.52 $119 $44 - -0.99%
UVE Universal Insurance 157.1 9.8 0.97 $442 $49 8.2% -1.01%
MAXY Maxygen 75.0 3.2 0.40 $184 0 - -51.61%
KCG Knight Capital 468.8 2.3 0.17 $7,490 $5,200 - -79.94%

 

Parke Bancorp (PKBK): A holding company for Parke Bank that provides banking services to individuals and small businesses in parts of New Jersey and Philadelphia, PA. The company trades at a -$41.40 m enterprise value and below net cash. The company has grown its book value in the last 3.5 years and has been profitable. The stock also sports an attractive PEG ratio of 0.5, which may or may not be relevant depending on how much stock you put in future earnings estimates (I don’t put too much).

Universal Insurance (UVE): A Florida based Property and Casualty insurer, the company can be bought in the market today at –239m enterprise value. If profitable operations and continuous book value growth were not enough, the stock also pays a dividend that currently yields 8.2%. Is the dividend sustainable? Look at the cash on the books and judge for yourself.

Update: Since this list was posted, we have bought and sold UVE for 73.14% total return in about 6 months

Maxygen (MAXY): Maxygen is a bio-pharmaceutical company out of San Mateo California working to help alleviate the effects of chemotherapy and acute radiation syndrome. While a small bio-tech company can be risky, it is worth noting that the company has 2.5x its market value as cash on the books, and has no debt. The earnings have been erratic in the past, so the value lies entirely in its cash hoard and an expectation that the cash will not be frittered away. Enterprise value is a nice -109m

Knight Capital (KCG): Most of us are probably aware of Knight Capital and its big High Frequency Trading boo-boo few months ago. Given that, it may be wise to take the ttm earnings with a pinch of salt and assume. Still, with the stock 80% down in the last 52 weeks, there is enough value for the investor looking for blood in the streets. The valuation goes like this: $7.5 B in cash, $5.2 B in debt and half a billion in market value. Enterprise value = –2.07B. Do you think the company will survive and be profitable again?

The question is which of these stocks are a worthy buy for a value investor. I will be posting my answer for the premium members.

Comments

  1. pbanik says

    @arohan
    PKBK holds more cash than debt, and I do remember what you told me about being careful when financial institutions are holding a lot of cash, because a lot of it doesn’t necessarily belong to them, but depositors.  It is trading well below book value. UVE also fits this criteria. 
     
    MAXY is interesting because it is trading below book value, and also because it has no debt, and also holds more cash per share than what is trading at.
     
    KCG  you have to proceed with caution. The reason is the total debt to equity ratio is extremely high, even though it is trading well below book value. I’m wondering if they’re still being punished for the glitch in their software earlier this year which led to erroneous trades. 
    http://www.marketwatch.com/story/flash-crash-rules-made-knight-keep-bad-trades-2012-08-07?siteid=yhoof2

    • says

      @pbanik Paul, for the banks yes, you have to check the nature of the cash. For the insurance companies it is a bit different. Premiums are earned, however they may have to pay out for the claims. For home insurance companies, typical events are fires, flooding, etc. In Florida, you also worry about hurricanes. Other than the hurricanes which can be unpredictable, the profitability of an insurance company depends on its underwriting discipline and cost controls so that is what needs to be reviewed for UVE. Most insurance companies diversify their risk by underwriting in different states, carefully choosing their customer profiles, or by buying reinsurance from a re-insurer who specializes in taking this risk on and mitigating it by diversification.
       
      I think MAXY is a bit more risky since it appears to be a development stage company with uncertain revenue streams. KCG’s debt to equity ratio is high because a lot of their equity was wiped out with the glitch. If the glitch was a one off event, they should be able to pull through. There is a regulatory risk as many countries around the world are working to put curbs on high frequency trading and some form of that may become reality in US as well. Ultimately the value lies in the possibility that you may assess these risks as less severe than most of the other investors are assessing them at.

      • pbanik says

        @ShaileshKumar  I think now might be a good time to buy INTC. It is trading at its’ 52 week low as of closing today. You can make this stock a long-term hold, because the P/E ratio is under 10, and the yield is 4%, which is well above the S&P500 average of 2.2%. I’m waiting for CSCO to drop a bit more before buying that stock, but the yield of 3% is reasonable. BHP might be worth looking at, since it’s P/E ratio is around 8, and the yield is 3.5%. I’m waiting for MSFT to drop under $25, before I buy in. The yield is over 3%, but it is trading at over 14 times earnings right now. I would like to drop under 12 times earnings, or preferably under 10 times earnings.

  2. MikeTsangaris says

    PKBK: Since the rock-bottom low reached during 2008, the stock has “only” recovered around 20%, which shows that valuation beforehand was ridiculously high (P/E TTM at its heights on 2006 of 20) and has now reached more reasonable levels at a P/E of 5 however by using the PEG ratio, it is now undervalued as@arohan mentioned but not giving too much weight on that one metric. Additionally it is undervalued on Price/Book and Price/Tangible Book at 0.42. The Street is not giving it a lot of love as it is flat for the year and has lost 10% in the past 52 weeks. It is too thinly traded and only covered by two analysts (1 overweight, 1 underweight) mean that it needs to grow to perform better.
     
    Although the financials look good fairly good at a glance, I seek dividend paying regional banks with market cap of ~$1 billion and so am staying away. With time, as it grows and with the stock splits if this comes on my radar again then it may be worth paying more attention to.

    • says

      @MikeTsangaris  @arohan There has been a lot of love lost on the street on these smaller financials specially if they write lot of small business and small commercial loans as the book quality is not clear.
      By the time it comes to the mainstream radar, the opportunity will be gone.

    • says

      As of close today (June 7, 2013), here are the prices:
      PKBK: $7.65/share
      MAXY: $2.49/share
      KCG: $3.61/share
      UVE: $6.99/share

      We made tremendous profit on UVE and it has been linked to from the article.

      We were just above breakeven on MAXY, however MAXY was one of the least risky stocks in the universe because the company had no operations and was actively working on shutting down and returning the assets to the shareholders. The wager was a call option on the possibility that they will be able to sell their remaining patents. If it worked, upside was tremendous. If it did not, downside was zero since the cash/share exceeded the stock price with no real operations to eat into it. “Heads I win, Tails I do not lose” are tremendous odds in my book.

      Interesting fact: In September, MAXY distributed $3.60/share in cash to the shareholders. To a casual observer it looks like the stock took a tumble into the penny land. Real investors would of course look deeper and know this.

      KCG is being purchased by GETCO for cheap. If you have been in the market for any length of time, you are aware of the Knight Capital Group’s trading fiasco. Despite the stock price in pennies as you say, it is still a half a billion dollar company with tremendous systems and IP assets.

      PKBK is up 36% since this was written and at $7.65/share today it is curious you insist the share price being in pennies (yes, technically all the stocks are priced in pennies, the question is how many pennies :-))

      I recommend investors to do more than a cursory due diligence. Acting based on own biases is not a good investment strategy.

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