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I like companies whose valuations are backstopped with pure cash and marketable securities. They have always made me excellent money. For some reaon I missed NTE despite owning it once and mulling over buying it when it traded near $5. I have the following two stocks currently that I purchased when they were trading near cash. They are up since then but the opportunity has not been completely capitalized:

TST: net cash and investements: $78M. MKT cap: 107M. Div: 3%. Cash flow +ve firms.

MOH: net cash and investments: 608M Mkt cap: 1.05B. Cash flow +ve

These have been low margin and very low revenue growth businesses so far but far from dead. Cash/investments backstops their share price quite well and so far my stance has been vindicated with nearly a double in MOH and 30% in TST but the appreciation is long over, IMO.

Anurag
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but the appreciation is long over

Hi Anurag,

Hmm, I think you mean "far from over." :-)

So what do these two do? I recognized NTE that was suggested upstream by nonzerosum. (And did anyone see the callout for that in my "3 Stocks for Your Watchlist" article? http://www.fool.com/investing/value/2011/02/16/3-stocks-for-... What? You don't read all my articles??) But, I don't recognize these two. (Blatant bid for more board conversation here.)

Cheers,
Jim
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Hmm, I think you mean "far from over."

That is what I meant. :)

TST: This is The Street.com. Remember Jim Cramer. A media company. Not too long ago, it was long in the doghouse for not having files its quarterlies for an year and pending account restatement. They had issues with their purchasing of another company called promotions.com. They got delisting or a stern warning notice too. The stock traded at an all time low and then in the midst of such depressing scenario they declared dividend. I went by the gut feel that a person like Cramer who relies on reputation would not do something stupid and purchased. A quarter later the filing was completed. The account restatement had insignificant changes. For the last several quarters there have been regular filings and dividends which is a sizeable one. They trimmed their workforce, sold the loss making promotions.com and did other house cleaning. They did all of this while maintaining their debt free status and keeping their cash and investments intact.

MOH: Very low margin health care business primarily confined to 2-3 states and very low revenue growth in recent past but last quarter was good. Afterall the good old republicans are back! It stayed debt free and managed to amass a cash horde close to their mkt cap when they were trading near $18. That is when I purchased it. Since then it used some of that cash to make a small acquisition that was profitable overall for 2010.

I am not savvy like you to do a detailed analysis on ROE or ROIC like metrics while differentiating between debt and equity markets. But I have seen it happen almost everytime that a cash flow positive firm that is not loosing revenue is a good bargain when having >50% of mkt cap in cash and marketable investments.

Similarly, I have seen that firms selling at a historic low P/E that produce good cash flows and rising revenues tend to do well despite everything else. Remember our discussion on IART boards? You had explained to me how the firms was not making good use of capital and that was a good lesson to me but the company did quite well since the $33 sell. I finally sold it near $49 and it now sells above $50. No longer a low P/E. So while it may not have fit the bill of a long term potential for SA newsletter, I think it was a MUE like stock at $33 and not anymore at $50.

I do not know if excessive cash or historically low P/E along with some other caveats like non-negative revenue growth, staying cash flow +ve, debt free and long term stable business case helps in determining MUE for you. Probably not. But I thought I will just throw in such metrics.

Anurag
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Hi Anurag!

I agree with you about TST -- in fact, like you, I concluded that Jim Cramer would not risk his brand on things like bad reporting, etc., and bought when things looked black. (I think Michael Olsen may have spotted TST a while ago as a Tiny Gem.)

In fact, TST is just one member of a basket of small cap dividend payers that I like -- other components include ARKR, EEI, HNNA, FHCO, RSGUF and RMCF.

I especially like HNNA - I think they have maybe about four non-institutional shareholders! Last year they sent me a hand-signed holiday card and they send personal notes about things like early dividend payments, etc.

All of these companies seem to manage cash very well, allowing them to pay a solid and well-covered dividend. You could argue that it would be better to reinvest in growing the business, but there are plenty of small caps that do that -- it is nice to have a basket of shareholder-friendly, cash-conscious businesses with strong growth possibilities due to their small size.

ARKR may be the weakest of the group, but it pays an excellent dividend and showed responsible dividend behavior through the GFC. It also fits Stillwater's venerable founder model.

I like Jim's MUE portfolio and have invested in RIG, DF, WDC and TXT based on his analysis. I am thinking of selling DF, however, since it seems a little overpriced given Jim's latest discussion of it.

Anurag, what do you think of the Indian portal company SIFY? A person I like and admire very much acquired a controlling interest in it a couple of years ago (he bought Satyam’s stake), and although I have no special knowledge about SIFY at all, I have very high confidence in his abilities. But I wonder what you might think of it? I know in general that segment of the Indian market seems very discredited these days.

Rich
BITB
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Hi Rich,

Thanks for the tips on other firms. I will check them.

I am invested in all of the MUE positions. I think I will wait of DF especially considering my small position here.

About SIFY, I have not been investigating this one. Due to my direct access to India Stock exchange I am able to access a bigger gamut of firms. I prefer to invest mostly in Indian blue chips and a few well known small caps. I note that SIFY and MMYT are not listed at the Indian Stock Exchanges. I find this wierd and worrisome but I admit I have not done enuf research here. I am likely to stay away from these unless GG recommends them.

Anurag
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Since then it used some of that cash to make a small acquisition that was profitable overall for 2010.

Hi Anurag,
Thanks for the MOH heads up. The cash and earnings look good although my guess is Jim would give them $0 FCF for 2010 because of capex and the acquisition.

And the acquisition financing puzzles me. It appears that MOH borrowed $105M on their credit line for the Q3 acquisition, and then they went and issued more shares ($111M) to pay off the credit line. This doesn't make sense given their huge and unrestricted cash hoard. Why not just use the cash (I thought that's what you said in your message)? And why issue shares when they were cheap (around $25)? That move cost shareholders $43.5M as of Friday's close because the shares have gone up $10 since the offering. Did management think the shares were overvalued at $25?

Their current liabilities are quite high so net cash and investments is less than $390M. If I use net income instead of FCF and back out the $300M, I get an implied 5 year growth rate of 0% followed by 1% terminal. That might not make it messed up enough, and its not FCF either. Without the acquisition they might have not grown which would make the stock fair value, i.e the 0% growth might not be messed up at all.

I wish I had seen this article in 2009: http://www.fool.com/investing/small-cap/2009/10/26/4-star-st.... mrindependent closed out in July and I can't find it in UltraLong's scorecard. What do you think their fair value is today?

Best,
tj
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Their current liabilities are quite high so net cash and investments is less than $390M.

What liabilities are you looking at. To get an estimate of net cash /investments I subtract just the debt. Rest of the current liabilities are balanced against the other current assets.

In any case, from recent quarter:
Total current assets: 958M
Total current liabilities: 510M

Net: 448M


The calculations you do for determining MUE would have been worse last -2 years back when stock traded near cash value at $17. Since then shares (and my investment) have doubled.

I think it is a mistake to focus only on growth and ignore a large cash position. But I understand if MUE philosophy is different.

Anurag
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What liabilities are you looking at?

As of Dec 31, 2010 (http://phx.corporate-ir.net/phoenix.zhtml?c=137837&p=iro...
Current Assets = $958M
Current Liabilities = $566M
Total Liabilities = $790M
Diff btw CA and CL = $390M, but you need to give them working capital and some interest payments with that long term debt so you can't back out all $390M.

The calculations you do for determining MUE would have been worse last -2 years back when stock traded near cash value at $17. Since then shares (and my investment) have doubled.

That's true, but we're in a rising tide. S&P is up 100% as well with much less volatility. Everyone is making money and the market is frothy. That's why I like Jim's super conservative approach - it is situation specific and less macro driven.
tj
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with much less volatility
actually, scratch that "volatility" remark.tj
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TJ,

Why do you ignore total assets of $1.5B? You can take away $212M goodwill if you want but the rest is valid. Total assets - Total Liabilities = 790M. Current Assets - current liabilities = $390M.

That's true, but we're in a rising tide. S&P is up 100% as well with much less volatility.

Since Nov 2009, when I purchased MOH it has thrashed SP500 by 2x.

Anurag
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