This Stock Costs Less Than a Sandwich

Let's get this out of the way from the start: The price of a stock does not matter. This is not to say that you should pay any price for a stock, but that whether a stock costs $5 or $50, it bears no relation to the underlying value of the security.

Some investors don't know this, and therefore believe that $5 JA Solar Holdings (Nasdaq: JASO  ) is "cheaper" than $50 Hewlett-Packard (NYSE: HPQ  ) . Nothing could be further from the truth. In fact, JA Solar doesn't make any money (and therefore could be worthless), while a $50 investment in HP will buy you more than $3 per share in annual earnings (which are actually worth something).

Get right out of town
As it turns out, there are a lot of truly expensive stocks trading with sub-$5 price tags. That's because this segment of the market -- what the pros call "low-priced stocks," what laymen call "penny stocks," and what I call "stocks that cost less than a sandwich" -- is generally where stocks go to die.

AIG (NYSE: AIG  ) was there before undertaking a 1:20 reverse stock split to try to boost credibility, Sirius XM Radio (Nasdaq: SIRI  ) is there as it continues to burn through cash, and GM was there prior to declaring bankruptcy. It's so bad, in fact, that many mutual funds prohibit their managers from investing in these types of securities.

It's precisely because so many of the stocks in this segment are written off by the market at large as garbage, however, that you can find big winners.

This stock costs less than a sandwich
It was in the middle of 2007 that, in the course of screening for small-cap stock ideas, I first came across Female Health Co. (Nasdaq: FHCO  ) . This maker of female condoms was then listed on the AMEX and trading for less than $3 per share.

While the stock was not without merits (it popped up on a screen looking for debt-free balance sheets, good returns on equity, and widening profit margins), I'm embarrassed now to say I dismissed it. It was truly small, free cash flow negative, and its core product sounded like a novelty.

Not so fast
Fast-forward one year and Female Health Co. came up again in conversation with a hedge fund manager friend. He owned the stock and was very high on its prospects. The stock was either going up, he said, or it would get bought out by a serious consumer goods company such as Johnson & Johnson (NYSE: JNJ  ) or Church & Dwight (NYSE: CHD  ) Although it was still trading on the AMEX for less than $3, I decided to give Female Health Co. a more serious look.

The product, as it turned out, was not a novelty, but rather a critical part of AIDS prevention efforts around the world. Further, FDA approval yielded a competitive advantage in that the governments and organizations engaged in these efforts can only purchase and distribute approved devices.

These facts meant that the company was now rapidly growing sales and generating significant cash flows relative to its market cap -- cash it was using to reward shareholders with share repurchases.

Finally, there was a catalyst in that the company was awaiting approval of a new second-generation product that carried significantly higher profit margins.

The market, however, had not caught onto any of this since most investors out there still saw what I saw at first: An AMEX-listed penny stock with a novelty product.

That's what makes a stock market opportunity
I, on the other hand, now saw real potential and estimated that Female Health Co. shares were worth approximately $5 apiece -- a near double from the then stock price. I bought and waited. While it took the market some time to catch on to Female Health Co.'s story, a combination of improving results and share repurchases meant that the price appreciation was near overwhelming when it finally did.

The shares traded all the way north of $7 in the middle of 2009 even as the rest of the stock market was collapsing, and, thanks to ongoing cash generation, the company recently declared a $0.20 annual dividend. That's a better than 3% yield at current prices and a better than 8% yield at my purchase price (something you won't normally get from a micro cap).

The moral of the story
I don't write all of this to brag about an opportunity you all missed (in fact, I believe Female Health continues to present compelling value). Rather, I write it to prove that there are some big potential winners out there trading for less than the price of a sandwich.

The problem, of course, is that they're hard to find and almost impossible to recommend to others (since they're liable to pop as soon as any attention is shined on them). This is why I've never been able to write about Female Health Co. at any great length anytime before on Fool.com.

That, however, is about to change. The Motley Fool is about to introduce a new research service focused exclusively on overlooked value opportunities, and it's going to limit the number of people who can access it in order to ensure that ideas as small as Female Health was a few years ago can be presented to members.

If that's something you're interested in learning more about, simply enter your email in the box below.

Tim Hanson owns shares of Female Health Co. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended buying calls on Johnson & Johnson. The Motley Fool's disclosure policy is not a novelty.


Read/Post Comments (21) | Recommend This Article (29)

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 February 26, 2010, at 12:46 PM, GCF007 wrote:

    Tim,

    Your statement that JASO doesn't make any money -- have you kept up with their latest reports?

  • Report this Comment On February 26, 2010, at 12:47 PM, GCF007 wrote:

    Tim,

    Your statement that JA Solar doesn't amke any money--have you kept up with the latest reports and what I am missing? Or is it you? Respectfully, GCF

  • Report this Comment On February 26, 2010, at 12:57 PM, yahoomania wrote:

    Tim, Motley Fools bashing is as transparent as your article. Maybe some day you can find a real job....one that will require you to have a brain.

  • Report this Comment On February 26, 2010, at 1:15 PM, yahoomania wrote:

    Tim, removing negative posts only make you more of a "fool"

  • Report this Comment On February 26, 2010, at 1:16 PM, yahoomania wrote:

    Apology: It appeared my original post was removed. It was not.

  • Report this Comment On February 26, 2010, at 3:35 PM, kanizfaruque wrote:

    Mr. Tim,

    what is your problem? if u need to let your paid subscribers to tell something, email them. Do you think,you missed the boat?

  • Report this Comment On February 26, 2010, at 4:55 PM, TMFMmbop wrote:

    Apparently I've upset a sassy group of JASO fanboys. Yes, the company has had two consecutive profitable quarters (high fives all around!). It has also posted negative earnings over the TTM period.

    So, look, we're both right!

    @yahoomania...that's a good and novel joke about turning "Fool" into an insult. No one has ever thought of it before.

    @pen1s...Actually, the joke is on you. Your mom didn't tell you about me?

    Good night ladies and gents. Tip your waitress.

  • Report this Comment On February 26, 2010, at 8:28 PM, JavaChipFool wrote:

    Way to keep your cool, Tim.

    I looked at mvis Microvision and exas Exact sciences and saw potential- bit too high on mvis 3.20, and just right on exas 2.41. Will hang on to both - I think the long term upside is still good on both.

  • Report this Comment On February 27, 2010, at 7:38 AM, TMFEnochRoot wrote:

    Best.comment.thread.ever

  • Report this Comment On February 27, 2010, at 2:55 PM, Fredlee009 wrote:

    Reporting this author to the SEC for fomenting. Not tolerating lies about this company anymore.

    SIRIUS XM ADDED 3 MILLION IN CASH IN Q4, AND HAVE HELD THE SAME COH LEVELS THROUGH THE WORST ECONOMIC YEAR IN DECADES. THIS WITH USING CASH TO PAY DOWN DEBT.

  • Report this Comment On March 02, 2010, at 12:18 PM, jsford11 wrote:

    I think the main thing is that Motley fool has published many articles discussing JASO and what a good investment they are, in fact show they have a 4 star rating. there should be an editor somewhere that reviews content to make sure it doesnt contradict other content that has been put out. Otherwise this is just a blog.

    Without taking the side of jaso too much, because I am objective, I have to correct the author to add to his "the company has had two consecutive profitable quarters, high fives all around"(the tone sounds like he's getting slammed behind the scenes) comment to clarify that they have also reported 78% year over year sales, record shipments, shipments revised upwards(twice) and a stock buyback in the last 2 quarters. I can think of many companies that would be better examples of the point he's trying to make.

  • Report this Comment On March 02, 2010, at 12:20 PM, jsford11 wrote:

    I think the main thing is that Motley fool has published many articles discussing JASO and what a good investment they are, in fact show they have a 4 star rating. there should be an editor somewhere that reviews content to make sure it doesnt contradict other content that has been put out. Otherwise this is just a blog.

    Without taking the side of jaso too much, because I am objective, I have to correct the author to add to his "the company has had two consecutive profitable quarters, high fives all around"(the tone sounds like he's getting slammed behind the scenes) comment to clarify that they have also reported 78% year over year sales, record shipments, shipments revised upwards(twice) and a stock buyback in the last 2 quarters. I can think of many companies that would be better examples of the point he's trying to make.

  • Report this Comment On March 02, 2010, at 3:53 PM, GCF007 wrote:

    I think we should have the article rescinded and corrected at a minimum...any MF writer can put pressure on the sale of a stock with an article like this posted by MF. Remember where the Fool term comes from---telling the truth, therefore, a corrected edition is in order.

  • Report this Comment On March 02, 2010, at 4:28 PM, MaxPower13 wrote:

    Fredlee, this is Bob with the SEC. Thank you for your e-mail. We have been investigating Mr. Hanson and his fomenting for years. This should give us enough to nail him.

    jsford, you must be new here. The Motley Fool is not a homogeneous entity. Each writer is allowed to express his or her views on a particular company (shocking, isn't it? Free thinking.) Most investors hate to read anything negative about their stocks, and that causes many people to get upset. A few of us actually enjoy hearing conflicting viewpoints on stocks we like/own.

  • Report this Comment On March 03, 2010, at 12:17 AM, easyavenue wrote:

    The disrespect shown in several of the Comments above concerns me. Such Comments have made me begin to re-think my appreciation of MF in general. For example, of what use is a CAPs database engendered by who knows how many angry, rude and irresponsible Members?

    Strange thing is the issues and ideas brought up by these Fools are perfectly legitimate insofar as they question the Author's data and research. But the manner in which they were expressed shows..., well, draw your own conclusions there.

    If this type of reaction - rudeness and anger - to ideas incongruous to your own is common in your lives then please, get help. See a Doctor. Maybe take up boxing. Or free-soloing.

  • Report this Comment On March 03, 2010, at 10:49 AM, spadermch2 wrote:

    I just don't see the point in comparing a company like Jaso and Dell. They should both be in a portfolio for completely different reasons. Jaso could easily double from its current levels but Dell will not. Dell has a long track record of steady returns, Jaso does not. BTW Tim, Jaso's TTM (Trailing 24 months) is positive. There were quite a few companies last March that are now $50 that didn't turn a profit in those quarters as well. Your comment that Jaso doesn't make any money sounds more like bashing than constructive criticism about a company and is in fact NOT true.

  • Report this Comment On March 03, 2010, at 10:57 AM, spadermch2 wrote:

    I don't really see the point in comparing a blue chip stock like Dell to Jaso. They should both be in a portfolio for different reasons. Jaso could easily double in the next few months whereas Dell provides steady return as you pointed out. Your comment that Jaso doesn't make any money just isn't true and sounds like bashing instead of a researched opinion on why someone shouldn't own the stock. In fact, their TTM (trailing 24 month) earnings are positive. A mix of higher risk greater reward stocks with steady gainers is something the Fool has preached for years but comparing the two makes little sense to me. I would love to hear a more apples to apples comparison next time.

  • Report this Comment On March 03, 2010, at 10:57 AM, spadermch2 wrote:

    I don't really see the point in comparing a blue chip stock like Dell to Jaso. They should both be in a portfolio for different reasons. Jaso could easily double in the next few months whereas Dell provides steady return as you pointed out. Your comment that Jaso doesn't make any money just isn't true and sounds like bashing instead of a researched opinion on why someone shouldn't own the stock. In fact, their TTM (trailing 24 month) earnings are positive. A mix of higher risk greater reward stocks with steady gainers is something the Fool has preached for years but comparing the two makes little sense to me. I would love to hear a more apples to apples comparison next time.

  • Report this Comment On March 03, 2010, at 10:58 AM, spadermch2 wrote:

    I don't really see the point in comparing a blue chip stock like Dell to Jaso. They should both be in a portfolio for different reasons. Jaso could easily double in the next few months whereas Dell provides steady return as you pointed out. Your comment that Jaso doesn't make any money just isn't true and sounds like bashing instead of a researched opinion on why someone shouldn't own the stock. In fact, their TTM (trailing 24 month) earnings are positive. A mix of higher risk greater reward stocks with steady gainers is something the Fool has preached for years but comparing the two makes little sense to me. I would love to hear a more apples to apples comparison next time.

  • Report this Comment On March 03, 2010, at 6:25 PM, spadermch2 wrote:

    Apologies, meant HPQ, not Dell in above posts. Clicked once too many as well.

  • Report this Comment On March 05, 2010, at 4:24 PM, 11787HOT wrote:

    I read info that the govt. was awarding billions on computer programs and services for many office

    divisions in Govt. I came up with Team Global.and jumped right in and invested .(TEAM)

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