These Stocks Are Smokin' Hot!

There are a lot of companies out there right now on their deathbeds: losing money, losing customers, losing future prospects, and losing all hope that tomorrow might be a better day. Some of them have lost so much market cap that their stock certificates might be more useful as toilet paper.

And some of them are probably good buys.

No, I'm not crazy
Benjamin Graham, a man best known as the Depression-era investor who taught Warren Buffett about value investing, specialized in what he called "cigar butt" investments.

In essence, he looked for companies that were discarded by the market as worthless and done -- but which still had one or two good puffs left in them. Sure, those businesses might eventually be destined for the scrap heap, but even if they were dying, they were still worth more than their market caps suggested.

Dying company, valuable stock?
When a company closes up shop, everything it owns doesn't simply disappear. All its stuff -- be it real estate, inventory, cash on hand, or accounts receivable -- is still worth something to a willing buyer. And everything left over after corporate debt is paid -- what's known as the liquidation value -- belongs to the shareholders.

Graham looked for companies whose liquidation value exceeded their market cap -- in other words, companies the market thought were worth more dead than alive.

Of course, not every company priced like it was going out of business truly was going out of business. But the beauty of Graham's approach was that he won either way.

If the company did go out of business, Graham's principal was largely protected, and he might have even seen a profit through that very liquidation. If, on the other hand, the business recovered, Graham stood to profit along with the other investors who stood by the company when things looked their bleakest.

He essentially searched for -- and found -- the investing equivalent of "heads I win, tails you lose." Talk about setting himself up for success!

Modern-day Montecristos
True cigar butts are rarer these days than they were in Graham's time, thanks in large part to computerized stock screening. But even so, there are still plenty of companies the market has written off.

For example, in this current economic slump, a number of companies are trading below their tangible book value. While not as strict as Graham's original criteria, tangible book value still represents a decent rough estimate of liquidation value. That alone makes them worth looking into.

But what if those same businesses are also expected to turn a profit in the coming year? Just take a look at these, for instance:

These aren't recommendations, merely suggestions for further research -- but these, or stocks like them, might well provide you with your very own "heads I win, tails you lose" moment.

Light 'em up!
Graham's cigar-butt strategy served as inspiration for Buffett and other successful value investors who followed. It's not a large leap to go from finding companies that are worth more dead than alive to the more modern approach of looking for ones priced below what their operations are worth. After all, a margin of safety is a margin of safety, regardless of whether it flows from a company's assets or its underappreciated operational strengths.

As the market continues to write off so many companies in its continued panic, puffing on Graham's cigar butts looks like it's once again becoming a profitable endeavor.

At Motley Fool Inside Value, we're finding more than cigar butts -- we're finding wholly intact premium cigars, available for purchase at rock-bottom prices. Market opportunities like these don't last forever, so we're taking advantage of what we can, while we can. If you'd like to see what we're uncovering, just click here to start your 30-day free trial -- there's no obligation to subscribe.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta did not own shares of any company mentioned in this article. Endurance Specialty Holdings is a Motley Fool Inside Value selection. The Fool's disclosure policy is worth more alive than dead -- or so it hopes.