One of the realities of a tough market is that fully-priced
stocks get discounted, and under-priced stocks become really,
really cheap. You can forget about the notion that stocks always
deserve to trade at whatever price they currently have -- known as
the Efficient-Market Hypothesis. Often times, the market is
mistaken and stocks can fall well below any appropriate value
Facing another day of red ticker symbols, I went looking for some
stocks that appear to be trading well below any sort of logical
level. When the market stabilizes and logic returns, it's these
oversold names that are often some of the strongest rebounders. It
happened in 2002 and again in 2008, when many stocks traded below
or for not much more than the cash on their
. Increasingly, the summer of 2010 is feeling like one of those
blue market periods. So let's look at some of these ultra-cheap
Cogent (Nasdaq: COGT)
(Editor's Note: After this column was posted, 3M (
) announced plans to buy Cogent on August 30th for $10.50 a share
-- a +20% premium to the closing price when the stock was
recommended on August 30th
This company is a leader in the field of rapid automated
fingerprint ID systems, the kind in use at airports and border
crossings around the world. If a bad guy is crossing a border
somewhere in South America but is wanted in France, these ID
systems will flag him right away. That's no mean feat when you
consider the number of fingerprints in the massive global
databases. Cogent's technology can scan millions of images in a
matter of seconds and invariably yield accurate results.
It was a good business for Cogent -- until it wasn't. Sales
exploded from $16 million in 2002 to more than $150 million by
2005, thanks to beefed up spending on Homeland Security. Sales
stopped growing at that point, though they have been above $100
million ever since. But investors' hopes for a resumption of strong
growth have been continually dashed.
If there has been a silver lining, it's that this
software-intensive business is remarkably profitable. Cogent
routinely generates net profit margins in excess of 25%, and that
has boosted cash and investments above $500 million. Cash has risen
even as shares have fallen to near all-time lows. The entire
company is worth just $775 million, or only $275 million when all
that cash is excluded.
Cogent's recent share price weakness is partially the result of
missed second quarter earnings estimates. Revenue recognition rules
sometimes lead to expenses hitting the
before revenue, which is what happened in the most recent quarter.
That should reverse in coming quarters. And management insists that
new orders have been pouring in with customers such as the
Department of Homeland Security, the U.K. Post Office, Los Angeles
County, the Pennsylvania Census Bureau and
Northrop Grumman (
. Cogent is also trying to secure potentially big contracts in
India, South Africa and Algeria.
Based on recent customer wins, results in the next few quarters
should be much stronger, according to the company. Most investors
are doubtful of a rebound until they see it. But with roughly
two-thirds of the company's
tied up in cash and the value of the company's technology worth
well more than the $275 million it is currently assigned, this
looks like a low-risk stock with reasonable upside.
Sterling Construction (Nasdaq: STRL)
This company, which recently slipped just below the $200 million
market cap threshold for stocks I'm usually willing to consider, is
involved in major transportation and water infrastructure projects,
mostly in the U.S. Southwest. The company has had good years and
bad years, but has always been profitable. Right now, business is
fairly slow: sales fell -5% last year and should only rebound by
+5% this year. Yet despite the constrained economic environment,
the bidding environment is actually improving for major projects in
Sterling's region, and management expects sales to start rebounding
more robustly next year.
Whether that rebound happens or not, shares are undeniably cheap,
trading for just 75% of book value, around two times cash and
around 10 times next year's profits. It's unlikely shares can fall
much farther, so investors can view this as an extremely
low-risk/moderate reward kind of stock.
CommonWealth REIT (
Formerly known as HRPT Properties, this
real estate investment trust (REIT)
owns a range of commercial properties throughout the Unite States.
These properties are about 86% occupied, and at that level, this
REIT is throwing off ample cash for investors. The recent
was more than 8%.
Most importantly, the company's portfolio of buildings is worth
more than $3 billion, even after accounting for the company's debt
load . But investors are assigning just $1.53 billion in market
value to shares, meaning this stock trades at half of book value.
You don't come across that kind of discount very often.
Action to Take -->
CommonWealth REIT has the most upside here -- a double -- simply
based on the market truly reflecting the value of its assets.
Cogent and Sterling Construction's upside is more limited, perhaps
upwards of +50%. Downside for all three of these stocks appears
quite limited, but it's important to be patient. As long as the
market remains in a funk, so will these stocks -- they simply allow
you to sleep better at night compared to other equity
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.