We continue to favor small cap stocks with low to zero debt on the books. The following stocks also pay dividends and are priced at less than 90% of the book value. As it turns out, 3 of the following 5 are financial companies, insurance and regional banks, and while majority of these stocks have had great runs in the past year, the valuations are still attractive. Here are the parameters for this stock screen.
- Market capitalization between $30 m and $900 m
- Dividend yield > 1%
- P/B ratio < 0.9
- Debt/Equity < 10%
The screen yielded 22 stocks and after preliminary filters we are left with 10. In this post I outline the first 5 stocks and will post the remaining 5 in a follow up post tomorrow. If you would like to invest in any of these stocks, please do further due diligence before you decide. As is the case with most small cap stocks with low to none institutional coverage, the liquidity in the shares can be very limited so patience is required.
1. TAT Technologies Ltd. (TATT):
Tat Technologies Ltd is 53.8% owned by Fimi Opportinity Funds which appears to be on the lookout for meaningful stakes in Israeli industrial companies. Tat makes heat transfer equipment for defense and electronic systems and its customers include Lockheed Martin (F16 emergency power unit and other components). With this Fimi acquisition (note that the shares still trade on Nasdaq) the company postponed its annual meeting and has not paid a dividend this year however it does have a history of paying irregular dividends. The shares are up 61% in the last year, but still trade at 0.73 times book value. Of the $60 million in market capitalization, about $30 million is pure cash on the books. Total debt is under $5 million. The company has been posting small losses over the last 3 years.
The value in the stock is in the strong balance sheet and the fact that it is being gradually acquired.
2. Kansas City Life Insurance Company (KCLI):
The stock showed up in one of my screens in Feb 2012. Over the last 1 year, the stock is up about 20%, and pays about 2.4% dividend. It is attractively priced at 0.66 times book value and carries no debt. 70% of the stock is owned by insiders so while the management confidence can be viewed as high, the float is relatively small. At $487 million in market cap the company is reasonably large and has been in the business since 1895. If you appreciate an old line stable business with significant family ownership that can still be bought for cheap and pays a healthy dividend, this might be your stock.
3. Peoples Financial Corporation (PFBX):
Peoples Financial Corporation is a Biloxi, MS based bank holding company and provides banking, financial and trust services to the government entities, individuals and small businesses. The $59.3 m market cap company has $334.66 million in short term cash and trades at 0.57 times the book value. The company has no debt (debt here means borrowings – customer deposits are considered liabilities that are backed up by assets such as cash, investments and loans out. There are Federal Fund repo agreements which can be termed as debt so be careful looking at the collateral on the asset side of the equation). Please note that normal financial data provided on sites like Yahoo Finance is misleading and you are advised to look at their quarterly and annual reports for the real picture (valid for all banks and financial institutions). The company also pays a 1.70% dividend on its stock.
4. Makinac Financial Corporation (MFNC):
Makinac Financial is a regional retail bank in the Upper Peninsula of Michigan. The holding company operates mBank that provides mortgage and commercial loans in addition to the retail banking products. The stock sells for 84% of the book value and yields 1.70%. The company has $26.2 million in cash and about $36 million of debt. The market cap is $52.4 million. It may be useful to look at its loan portfolio to get a good estimate of potential losses, however at the first glance the balance sheet looks strong. The stock is also up 38% in the last one year but the value still remains. The ttm P/E ratio is 13.68. In the past year the bank has seen its credit quality and Tier 1 capitalization ratios improve significantly and is considered “well capitalized”.
5. Bel Fuse Inc (BELFB):
The company designs, manufactures, and sells products used in the networking, telecommunication, high-speed data transmission, commercial aerospace, military, broadcasting, transportation, automotive, medical, and consumer electronic industries worldwide and did $286.6 million in sales in 2012 and is profitable. The stock can be purchased at 0.89 times the book value, pays a 1.7% dividend and is about 77% owned by insiders and institutions. The company has $38.6 million in cash and close to zero debt. These shares are B-Class shares.
In the past I have stayed away from banks where I suspect assets might be toxic or the balance sheet might be hiding unknown liabilities. Most of the regional banks should be unsullied though. For most insurance companies I have no such concerns. Still a thorough review of the balance sheet and financial statements going back a few years is always a good idea. You need to consider the mortgage exposure and the balance sheet strength. Low debt levels should mitigate most of the concerns.
Note: A few of these stocks may be added to the Premium watch list and may eventually end up as a member recommendation.
Watch this space for the next set of 5 more small cap stocks fitting this criteria