Brian Pinchuk is a portfolio manager at Lorne Steinberg Wealth Management in Montreal.
What are we looking for?
At Lorne Steinberg Wealth Management, we are always on the hunt for value and the opportunity to buy a dollar for 50 cents. Purchasing a company’s shares at such a steep discount not only affords a high degree of downside protection, but simultaneously offers the potential for healthy gains.
Today we are combing the market for “golden opportunities” – a term used for shares priced so irrationally that no owner would consider selling them at such an unreasonably low price point. The term in this context was coined by Benjamin Graham, who was Warren Buffett’s professor and considered the father of value investing. While such opportunities should not be available if the market were perfectly efficient, the anomaly does arise from time to time.
With this in mind, we developed a screen to search for company shares that are trading for the highest degree of "net cash" (cash a company has in the bank minus all of its liabilities, as compared with its market capitalization). Said differently, we are looking for shares of a company where the market is ascribing such little value to its operations that if the firm simply closed its doors and paid off all its obligations with its cash, we may be buying the remaining cash at a discount (and getting the balance of the assets for free).
Though it can take time for stock prices to become rational again, as Mr. Graham put it, over the long term, “golden opportunities” can prove far more remunerative than most other investments. That said, such investments require a great deal of patience and a conscious decision to not participate in the short-term performance derby of Wall Street.
Taking this approach, I employed the power and breadth of S&P Capital IQ, allowing me to filter out a universe of over 60,000 globally listed stocks. The accompanying chart shows the top 20 companies ranked by net cash – a good starting point for unearthing value. It is interesting to note that most of the companies on the list are small cap and based in Japan, an area many value investors like ourselves consider to be the cheapest hunting grounds for value.
However, judgment and thorough research must always be used over and above the tool of stock screening. After all, when shopping at a discount store, one must be mindful that many things are cheap for good reason. It is especially important, for companies trading at a discount to net cash, to ensure that management is not continuously destroying value nor exposed to poor governance practices. Investors are strongly advised to do their own research before buying any of the stocks listed here.