An Absolutely, Ridiculously Cheap Stock

The consensus is that stocks are cheap. Warren Buffett said so, and we Fools have echoed the sentiment. Heck, even GMO's bearish head, Jeremy Grantham, admits that stocks are so cheap that he's interested in nibbling at today's prices.

And you needn't look far to find bargains, with many of the world's top companies trading near historic lows:

  • Berkshire Hathaway (NYSE: BRK-B  ) recently traded for less than book value.
  • Microsoft (Nasdaq: MSFT  ) -- another company boasting a AAA-rated balance sheet, with $19 billion in cash and short-term investments versus no long-term debt -- trades for just 10 times earnings and roughly 11 times free cash flow.
  • Google (Nasdaq: GOOG  ) trades at 2005 levels, even though its profits have grown at a compounded annual growth rate of 57% since then.

Companies such as Boston Scientific (NYSE: BSX  ) , Electronic Arts (Nasdaq: ERTS  ) , and Dell (Nasdaq: DELL  ) have netted investors an annualized loss of more than 15% over the past five years -- disappointing to long-term investors, but spelling opportunity for those with capital today.

It's safe to say good deals abound.

But I recently came across a stock that's so ridiculously cheap that by investing at current prices, you're getting all of its profits -- current and future -- along with almost $3 extra in cash for free!

That's right, free!
The stock I'm about to reveal is priced with a negative enterprise value. That is, the market currently values the company for less than the net cash on its books -- about 25% less.

Stocks like this are not only how Buffett made his first few millions, but they also make the best investments in times such as these. In fact, a recent Bloomberg.com article noted that stocks priced with a negative enterprise value during the last bear market were up by an average of 115% a year later. Virtually no downside risk, significant upside potential -- sounds to me like a potentially terrific investment.

Terrific investment indeed
The cheap company I'm referring to is KHD Humboldt Wedag (NYSE: KHD  ) , a small-cap company that makes machinery for producing cement and processing coal and minerals for developing economies in Asia, the Middle East, and Russia.

A certain amount of its depressed valuation makes sense -- a global economic slowdown could mean less infrastructure spending and, thus, less demand for KHD's products. Moreover, if access to credit continues to be stifled, the emerging markets KHD targets will have difficulty acquiring the financing necessary to fund desired infrastructure projects. In that case, KHD would probably earn less revenue and could be required to return some cash to its customers.

Nevertheless, the company is very profitable, has strong long-term prospects, and enjoys a sizable backlog of more than $1 billion -- almost two times this year's revenue. It closed yesterday at $10.03, despite having nearly $13 in net cash per share in the bank. That's a significant margin of safety, and it doesn't even account for less-liquid assets on its balance sheets, such as stakes owned in subsidiaries.

That's absolutely, ridiculously cheap.

Yet that's not all
I discovered this company's unbelievably cheap status by running a screen for all U.S. companies with insider ownership of more than 5% that currently have a negative enterprise value. What might be surprising is that, of the 120 companies this screen produced, every single company had a market cap of less than $1.3 billion, meaning they were all small caps.

See, smaller companies tend to attract less coverage from Wall Street analysts and so are more likely to be mispriced -- either overvalued or, in KHD's case, undervalued. When the market finally turns around (and I believe it will eventually do so), investments in small caps such as KHD will greatly reward investors. When you lock in your purchase with such a significant margin of safety, you set the foundation for even greater long-term returns.

If you're looking for more international small-cap stock ideas with significant margins of safety, you can check out our top picks at Global Gains free for 30 days. Click here for more information.

Fool analyst Adam J. Wiederman owns shares of Berkshire Hathaway but of no other stocks mentioned above. The Motley Fool also owns shares of Berkshire Hathaway, a Stock Advisor and Inside Value recommendation, as well as KHD Humboldt Wedag, a Global Gains recommendation. Microsoft and Dell are Inside Value recommendations. Google is a Rule Breakers recommendation. Electronic Arts is a Stock Advisor recommendation. The Fool's disclosure policy is now out of recommendations but can nonetheless be found here.


Read/Post Comments (5) | Recommend This Article (54)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 19, 2008, at 1:45 PM, frankiwa wrote:

    All that cash isn't theirs. There is an offsetting current liability that reveals the true amount of cash which is much less.

  • Report this Comment On December 19, 2008, at 6:33 PM, MotleyGulibles wrote:

    The Motley Fool writes about stocks in both free and paid content. ( ...) To be fair to the newsletter subscribers, we do not disclose in our free content any stock recommendation made as part of our premium services for at least 30 days from its recommendation date.

    American Oriental Bioengineering and others was published in free newsletter 10 days after purchase.

    In this market all that bought upon disclosure in Free newsletter made out better than those that paid for the service.

  • Report this Comment On December 19, 2008, at 6:34 PM, MotleyGulibles wrote:

    Thanks for KHD ...

  • Report this Comment On December 22, 2008, at 4:38 AM, WhiteMamba wrote:

    Berkshire bankrupt by 2015

  • Report this Comment On December 23, 2008, at 12:54 PM, comissar wrote:

    To WhiteMamba: Why? To say that BRK's value may continue to diminish is one thing, but why would someone that owns big chunks of profitable companies with minimal leverage go bankrupt?

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