A Deep Value in Tech

It's getting awfully lonely again in the world of value investors. The Dow Jones Industrial Average put in eight straight weekly gains and was on pace for a ninth before Friday's rocky end to the week. That ninth week would have left the Dow in rare territory: Since 1970 it has risen over nine consecutive weeks just twice.

I'm not one to chase stocks at such lofty levels, especially when you consider that the market is on a sugar high from all the liquidity being pumped into it by Ben Bernanke's newest "quantitative easing" program.

So when the market gets extended, as it has over the past several weeks, I'm more likely to research stocks that have a greater margin of safety and value on their balance sheets instead of in future unrealized earnings. My starting point in this type of environment is to follow a legend such as Benjamin Graham and look for deep value stocks using his Net Current Asset Value (NCAV) model screen.

Ben Graham's deep value search
Graham's value screen looks at current assets and subtracts all liabilities:

Cash and short-term investments (0.75 * accounts receivable) (0.5 * inventory) - total liabilities

Basically, the idea is to look for companies that trade near or below their liquidation level, so that if a company does go out of business, the cushion is the cash and other assets the shareholders still own. Graham liked to buy stocks that traded near two-thirds or less of their NCAV.

In my research, the point is not to find the stocks that trade at the largest discount to NCAV, because you'll mostly find penny stocks and other microcaps. Instead, I suggest looking for companies that come close to meeting these requirements and provide a nice cushion in case of worst-case-scenario situations.

So, what stock looked the most attractive from this standpoint? Rimage (Nasdaq: RIMG  ) .

Rimage is a leader in providing digital publishing systems for businesses, governments, hospitals, law-enforcement agencies, and even college and professional sports teams. These systems are used for the reproduction of CDs and DVDs using customized digital content on demand. If a business needs to get some data or software to a lot of people in a hurry, Rimage's traditional business has been to provide systems that can make it happen.

I know what you're thinking, and so does the company's management team. Yes, there are more practical ways to store and pass along data. Storage today is all about the cloud, and clearly Rimage is not on par with these solutions, or even with integrated hardware-storage companies such as Western Digital, SanDisk, or Seagate Technology. However, Rimage still lists more than 17,000 customers, including 70% of the Fortune 100 in the United States, Europe, and Asia.

More importantly, Rimage management understands the threat to its core business and has been focused on diversifying. Perhaps its biggest opportunity for growth is in its growing medical-imaging business. Rimage recently received a business license from the Chinese government (no simple task) to deploy its medical-imaging technology in hospitals throughout the country.

With the Chinese government committed to health-care reform, the country's medical spending has seen rapid growth. This year, China is expected to become the world's third-largest health-care market. China's medical-imaging-device industry is currently dominated by large multinational companies such as General Electric (NYSE: GE  ) , Siemens (NYSE: SI  ) , and Hitachi (NYSE: HIT  ) . Rimage has an opportunity to provide more efficient media and storage for these device makers as China's health-care system transitions from more expensive medical film to optical-disc media for radiology and other necessary practices. If Rimage can gain some of this market share, it should add significantly to its revenue.

The screen
Although Rimage certainly faces some significant challenges in transforming its business, its balance sheet and valuation offer a large margin of safety for investors. Rimage has $97 million in cash on its balance sheet and a market capitalization of only $137 million, so if you purchased the entire company today, you would get more than 70% of the purchase price back in hard cash.

Rimage shares closed at $14.15 on Friday, which is about 124% of its NCAV of $11.45. That's a little pricey by Ben Graham's standards. However, this deep-value screen isn't yielding many good companies at compelling valuations right now.

And even though the stock is relatively cheap, the fundamentals of the business make me want to wait until the NCAV is closer to Ben Graham's specified buy levels to get into a name like this. The wait may be well into the new year, but in the stock market, as in life, patience is a virtue.

Want to read more about Rimage? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Fool contributor Andrew Bond owns no shares in the companies listed. The Fool owns shares of Western Digital. You can follow Andrew on Twitter at @Bond0 or on his RSS feed. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.


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