Are There Really Stocks Selling Below The Cash per Share?

 

The cash per share is a financial metric that measures the amount of cash a company has per outstanding share of common stock. It is calculated by dividing the total cash and cash equivalents of a company by the number of outstanding shares.

The significance of the cash per share lies in its ability to provide insights into a company’s liquidity and its ability to cover short-term obligations. A higher cash per share indicates that a company has a larger cash reserve available to meet its financial commitments and is generally seen as a positive sign. It suggests that the company is well-positioned to handle unexpected expenses, fund its operations, pay dividends, or invest in growth opportunities.

Investors and analysts often use the cash per share as one of the indicators of a company’s financial health and stability. It can be compared across different companies within the same industry or used to assess a company’s performance over time. However, it’s important to consider the context of the industry and the company’s business model since different industries may have different capital requirements.

While a high cash per share can be seen as a positive signal, an excessively high amount of cash may also indicate that the company is not effectively deploying its cash. It might suggest that the company is not investing in growth opportunities, paying off debt, or returning value to shareholders through dividends or stock buybacks. Therefore, it’s crucial to consider other financial metrics and factors when evaluating a company’s overall financial health and investment potential.

The price-to-cash ratio (P/C ratio) is a financial metric that compares a company’s market price per share to its cash per share. It is calculated by dividing the market price per share by the cash per share.

The P/C ratio is used to evaluate the valuation of a company’s stock relative to its cash reserves. It provides insights into how the market values a company’s cash position. A lower P/C ratio suggests that the company’s stock is relatively undervalued compared to its cash holdings, while a higher P/C ratio indicates that the stock may be overvalued.

Investors and analysts use the P/C ratio as one of the valuation metrics to assess investment opportunities. However, it’s important to note that the P/C ratio should not be analyzed in isolation but should be considered alongside other fundamental and financial factors.

In simple terms, imagine that a stock is selling for $5 per share, and the company has cash per share of $10. If the company was debt free and went out of business today, and all the other assets of the company (such as real estate, machinery, inventory, etc.) were totally worthless, the investors would still double their money due to all the cash.

Obviously, this is an extreme example, but having more cash per share than what the stock is trading at can provide a huge cushion.

Buying stock in companies with a low price-to-cash ratio can have several potential advantages. Here are a few reasons why investors might find it advantageous:

1. Value Investing: A low price-to-cash ratio is often associated with value investing, which involves seeking stocks that are undervalued by the market. Investors who follow this approach believe that the market may have overlooked or undervalued the company’s cash reserves, leading to a potential buying opportunity. By purchasing stocks at a lower price relative to the company’s cash position, investors aim to benefit from a potential increase in stock price as the market recognizes the company’s underlying value.
2. Margin of Safety: Investing in companies with a low price-to-cash ratio can provide a margin of safety. The cash holdings of a company act as a financial cushion, providing stability and reducing the downside risk. If the market price of the stock declines, the cash reserves can provide a buffer and support the stock’s value. This can be particularly appealing to risk-averse investors who prioritize capital preservation.
3. Potential for Special Situations: Companies with low price-to-cash ratios may present special situations that could unlock value for investors. For example, a company with a substantial cash position may be in a position to initiate a dividend payout, engage in share buybacks, or make strategic acquisitions. These actions can signal confidence in the company’s prospects and have a positive impact on stock price.
4. Flexibility for Growth and Opportunities: Companies with ample cash reserves have the flexibility to pursue growth opportunities, invest in research and development, or weather economic downturns. A low price-to-cash ratio may indicate that the market has not fully recognized the potential for future growth or the strategic advantage of the company’s cash position. By investing in such companies, investors can potentially benefit from future growth and value creation.

So do these companies exist? Yes, but unfortunately, most are extremely low capitalization stocks.

Acacia Research Corporation (ACTG) is headquartered in Newport Beach, California. It specializes in acquiring and licensing patented technologies. Established in 1993, the company’s primary focus is on monetizing intellectual property by partnering with inventors, patent owners, and research institutions. Acacia Research Corporation operates through various subsidiaries, including Acacia Research Group LLC, Acacia Patent Acquisition LLC, and Acacia Patent Acquisition Corporation, each specializing in different technology sectors.

The business strategy involves identifying patent portfolios with licensing potential, negotiating agreements with companies that may be infringing on those patents, and generating revenue through licensing fees, settlements, and royalties. Additionally, the company may pursue legal enforcement actions, such as filing lawsuits, to protect patent rights and seek damages. Acacia Research Corporation also manages its own investment portfolio of intellectual property assets, actively seeking opportunities to acquire patents from inventors and other intellectual property owners.

Acacia Research has a market cap of $248 million and a sky high forward price to earnings ratio of 204. However, this company, which has no long term debt, has $7.83 in cash per share but last traded for $4.08 per share, giving it an outstanding price to cash ratio of 0.52.

Allied Gaming & Entertainment Inc. (AGAE) is a provider of entertainment and gaming products worldwide.

It is an extremely low cap company at $37 million. This debt free company has $2.04 in cash per share but last traded at 95 cents per share, giving it an excellent price to cash ratio of o.47. It is currently generating negative earnings.

LGL Group, Inc. (LGL) based in Orlando, Florida, operates as a diversified holding company in the electronics manufacturing industry. With a history dating back to 1917, LGL Group primarily focuses on providing electronic components and solutions to various industries.

The company operates through its subsidiaries, including MtronPTI and Precise Time and Frequency, Inc. MtronPTI specializes in the design and manufacturing of frequency control devices, oscillators, and filters, catering to sectors such as aerospace, defense, telecommunications, medical, and instrumentation. PTF, on the other hand, specializes in precision time and frequency references and network synchronization solutions.

LGL Group’s products find applications in telecommunications infrastructure, ensuring reliable timing in networks, while the aerospace, defense, medical, and instrumentation industries rely on their solutions for mission-critical applications. The company emphasizes research and development to drive innovation and maintain quality in its offerings.

This debt free company is also extremely low cap at $25 million, however, it has a favorable forward price to earnings ratio of 12.35. It has a decent price to cash ratio of 0.66.

It’s important to note that while a low price-to-cash ratio may indicate potential value, it should not be the sole factor considered in investment decisions. Conducting thorough research, evaluating the company’s fundamentals, assessing its competitive position, and considering other financial metrics are essential to make well-informed investment choices.

Disclosure: The author didn’t own any of the above at the time the article was written.