Companies That Sell for Less Than Their Cash

Some stocks, such as GM, UAL, and Bank of America, are so beaten down that they're priced lower than the cash on their company's books

By Peter Carbonara, Arik Hesseldahl and Tara Kalwarski

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Looking for signs of value in the wreckage? By one measure at least, the stock market seems cheap.

A BusinessWeek analysis of stocks with a market value of $500 million or more found that 29 U.S. companies and 185 foreign ones were trading for less than the amount of cash on their books as of Oct. 14. At the depths of the last bear market—in October 2002—only 14 U.S. and 77 foreign companies fit the bill. Notwithstanding debt, investors are essentially pricing the companies as if their operations were worth zilch—an indication the stocks may have been oversold. "It's a tempting signal to buy," says Charles Wolf, an analyst at asset manager Needham & Co.

Famed value investor Benjamin Graham, who mentored Berkshire Hathaway's (BRKA) Warren E. Buffett, codified the use of this measure 80 years ago. During the Great Depression, Graham observed that a number of public companies were selling at a discount to their cash hoards, including auto- and truck-maker White Motor. When this happens, Graham noted in Security Analysis, the value investors' bible he co-authored in 1934, "either the price is too low or the company should be liquidated."

In the current bear market, the list is dominated by financials such as Morgan Stanley (MS) and Australia's Macquarie Group, which have been hit by the credit crisis. Others, including carmaker General Motors (GM) and airline UAL (UAUA), are struggling amid industrywide downturns.

Whether such companies should be placed in the trash heap or the bargain bin depends on a number of factors. From an investment perspective, high debt load, for example, makes a company's cash position look less impressive. ADC Telecommunications (ADCT) has cash assets of about $657 million, in line with its market size. But the maker of electronics gear also has about $650 million in debt. A company spokesman declined comment, except to note that ADC plans to buy back $150 million of stock.

Another question is what counts as cash. Under accounting rules, certain short-term investments qualify as so-called cash equivalents. Earlier this year, a number of companies found that their cash hoards included auction-rate securities, some of which were stuffed with subprime loans and other toxic assets.

Cash can also disappear quickly. Cypress Semiconductor (CY) recently held $819 million in cash. But the tech company used some to make an acquisition and pay off debt. A spokesman says Cypress, scheduled to report earnings on Oct. 16, now has a cash position that amounts to less than half its $644 million market value.

If history is a guide, however, these types of companies may be poised to take off. After the dot-com bust, the 14 U.S. companies whose cash was worth more than their stock saw prices rise by an average of 66% over the next 12 months. The gain for the Standard & Poor's 500-stock index: 29%.

With reporting by Ian Rowley in Tokyo.
Carbonara is a senior writer for BusinessWeek. Hesseldahl is a reporter for BusinessWeek.com. Kalwarski is Numbers department editor at BusinessWeek.