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Cash Rich, No Debt Stocks
Posted: Feb 08, 2010 11:58 AM
by
Sham Gad
It's no secret that balance sheets are important. That notion became critically important during the financial crisis in 2008. A strong balance sheet can be the difference between success and failure in down markets. In addition, lucrative balance sheets leave open other doors of value creation. (For a quick refresher on this topic, check out Reading The Balance Sheet.)
IN PICTURES: Eight Ways To Survive A Market Downturn
Safety In Numbers
Protection is the name of the game in investing. Anytime you can find a company with lots of cash and little or no debt, it's worth a closer look. Even if the company looks like it may be losing earnings power, an orderly liquidation can be just as rewarding if the price is right. In other words, an investor could still do well if the company dies. The key to appreciating this concept is investing through the lens of a business owner and not a stock price follower.
Ownership Has Its Privileges
QLT (Nasdaq:QLTI), is a bio-pharmaceutical company with a specific focus in the field of ophthalmology. The company has some interesting prospects in the pipeline in Phase I and Phase II trials. The company shares are priced at $4.50, with $3.55 in cash per share, and no debt. The company is profitable and management appears conservative.
The potential upside could be fantastic if QLT gets any of these new drugs into Phase III. In the meantime, it's costing investors less than $1 a share to play this option once the cash is stripped out. (For related reading, check out Using DCF in Biotech Valuation.)
Similarly, oncology biotech company Facet Biotech (Nasdaq:FACT) trades for $15.50, has $13 a share in cash, and virtually no debt. One of the company's largest shareholders is Seth Klarman's Baupost Group. Months ago, giant Biogen (Nasdaq:BIIB) made an offer to buy the company for $17.50 a share, but Facet rejected that as inadequate and was supported by its largest shareholders. Clearly, these guys see much more upside than the offer price.
Dial In
A neat little company worth a look is Linktone (Nasdaq:LTON), a $70 million technology company based in China. Linktone provides content to mobile phone users like ringtones and screen savers. Its services are used by the likes of China Mobile (NYSE:CHL) and other large Chinese telecommunications providers. The shares trade for $1.67, cash per share is $2.37, and there is no debt.
The Bottom Line
Cash rich, debt-free businesses are always worth a closer look. Dead or alive, they can often offer investors an upside scenario when obtained at the right price.
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By
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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