Balance Sheets Matter

Every financial transaction passes through the balance sheet. So, don’t underestimate its importance in finding mispriced stocks. Transaction such as sales, expenses or capitalized expenses, depreciation, capital expenditures, stock issuance, all impact the BS. Further, assets are recorded at original cost not fair market value. Therefore assets such as real estate acquired years ago often present an opportunity.

An interesting post on alphaarchitect.com,  Value Investing Research: O-Score and Distress Risk

Article summarized key investing “take away” from an academic paper Book-to-MarketEquity, Distress Risk, and Stock Returns   by Griffin and Lemmon (2002 Journal of Finance).

The paper examines the relationship between book-to-market equity, distress risk,and stock returns. Among firms with the highest distress risk as proxied by Ohlson’s  ~1980!   O-score,    the   difference  in returns between high and low book-to-market securities is more than twice as large as that in other firms. This large return differential cannot be explained by the three-factor model or by differences in economic fundamentals. Consistent with mispricing arguments, firms with high distress risk exhibit the largest return reversals around earnings announcements, and the book-to-market effect is largest in small firms with low analyst coverage.


Low P/B (high book to market) is a market anomaly offering investors alpha. The higher risk theory was that low P/B (high book to market) outperformed because of higher risk. This was proven wrong by testing distress risk using the O score (Ohlson). In fact the higher P/B (low book to market) were riskier measured by the O score. The variance of returns from low P/B (high book to market) to high P/B was more than twice as large. The mispricing is more profound for high distress low P/B compared to high P/B high distress. Lastly the inefficiency impact is largest for small companies with little or no analyst coverage. A simple low P/B strategy outperforms on average.

The following is a sample of stocks meeting these filtered criteria. 1) Bottom 30% for P/B 2) stable share count or reduction from 2012, 3) market cap less than 140M 4) Strong Recent Insider Buying

Click for quotes on the stocks Below

SymbolCompanyIndustry% Below 52 Week HighInsider OwnershipMarket Cap($Mil)Enterprise Value($Mil)Revenue TTM ($Mil)Revenue 2013 ($Mil)Shares Outstanding TTMShares Outstanding 2012Tangible BV Per Share TTMTangible BV Per Share 2012P/B
BDRBlonder Tongue Laboratories IncCommunication Equipment71.00%335.1810.528.2927.876.266.221.522.110.4
CTGComputer Task Group IncInformation Technology Services50.00%10137.01102.59392.841915.4115.173.953.581.2
IBALInternational Baler CorpDiversified Industrials30.00%159.079.1919.916.
INTTinTest CorpSemiconductors27.00%1744.3621.8843.1939.4310.4710.272.982.31.3
JVACoffee Holding Co IncPackaged Foods32.00%2431.4533.88124.81346.226.373.73.591.3
LUBLuby's IncRestaurants18.00%28139.84186.27395.6384.229.0128.355.235.170.8
MINDMitcham Industries IncScientific & Technical Instruments70.00%1649.363.6574.5692.1112.0212.721113.080.3
MXWLMaxwell Technologies IncElectronic Components61.00%11139.55131.71175.3193.529.4528.573.263.391.2
STLYStanley Furniture Co IncHome Furnishings & Fixtures16.00%945.6340.868.6658.5614.2414.332.935.991
TWMCTrans World Entertainment CorpSpecialty Retail12.00%52110.918.37349.2393.731.2131.585.515.670.7
Blonder Tongue Laboratories Inc.(BDR): Blonder Tongue Laboratories offers television signal encoding, transcoding, digital transport, and broadband products to the media industry. The company was founded in 1950, headquartered in Old Bridge, New Jersey.

This deep value is partially driven by its discount to the fair market value of its tangible assets coupled with its market size in relation to revenue and gross profit. Book value is 12,380,000 or 1.98 per share versus price of $.81 or market cap of 5.07M . Real estate likely worth near or more than current market capitalization. BDR owns 20 acres of land in Old Bridge NJ + facilities of 130,000 square feet.

International Baler Corp. (IBAL): International Baler Corp is a manufacturer of baling equipment. Technical, hydraulic and electrical mechanisms are used to compress a materials into bales for easier handling, shipping, disposal, storage, and recycling.
Only 519,430 shares are outstanding in the public float. AVIS INDUSTRIAL purchased 24,400 shares (April to August 2015)  for $44,075 or an average price of $1.80, 4.70% of the shares in the float.

STLY: Stanley Furniture Co. Inc founded in 1924 is based in Virginia. STLY "designs, manufactures, and imports wood furniture for the residential market in the United States".

Luby's (LUB). It's not only real estate rich. Even more important, Luby's is a highly fixable opportunity to leverage its diverse assets.

Computer Task Group Inc. (CTG)  Computer Task Group is an international IT staffing and services company. Employee count is 3,900 with geographically diversified operations in North America and Europe. CTG has a large presence in the fast growing healthcare market, implementing electronic health records and health information exchanges. Proprietary software is available  to support healthcare providers and clinical systems integration.  Founded in 1966, besides the health care sector CTG serves technology providers, financial services, energy , and general markets.

Maxwell Technologies (MXWL) : develops, manufactures and markets energy storage and power delivery products for transportation, industrial, information technology,  other applications and microelectronic products for space and satellite applications. Source Morningstar
Royce added more to it's 4.70% TSO position during most recent reported quarter.

Mitcham Industries (MIND) leases and sells geophysical and other equipment used by seismic data  contractors to perform seismic data acquisition surveys on land, transition zones and deep water  areas.
John Rogers from Ariel Investments added more to its 24% of total shares outstanding.

Spark Networks (LOV) owns and operates focused online properties. Its primary properties include JDate.com  and ChristianMingle.com dating websites.
Miller Lloyd purchased 101,255 shares FY 2015 for $302,891 or $2.99 per share.  Director purchased 20,000 shares for $69,925 for $3.49 per share.

Trans World Entertainment (TWMC) is a specialty retailer of entertainment software, including music, video, video games and related products in the United States. It operates a chain of retail entertainment stores and e-commerce sites.
Guru Nano Cap Deep Value investor MILLER LLOYD purchased 861,861 shares of TWMC during 2015 and 2014.  FY 2015 Miller Lloyd purchased 631,326 shares at an average price of $3.25 for $ 2,057,532 or 7.05% of the shares in the float. FY 2014 Miller Lloyd purchased 230,535 shares at an average price of $3.21 for $741,552 or 2.85% of the shares in the float. FY 15 and 14 founder Mark Higgins purchased 7,000 shares at an average price of $3.47 for $24,345.
A total of 919.557 shares or 10.27% of shares in float.


Symbol Price 08/07/15 P/TB_TTM P/TB_2013 Price Change    (24 weeks) Price Change  (52 weeks) Price Change  (3 years)
BDR $0.81 0.53 0.54 -55.85-12.44 -7.09
CTG $6.89 1.42 4.58 -18.03 -51.13 -22.95
IBAL $1.75 1.15 1.19 -25.53-5.41 -5.9
INTT $4.01 1.43 1.45 2.62 -9.19 15.37
JVA $4.86 1.34 1.62 -3.13 -18.45-4.9
LUB $4.89 0.94 1.33 -3.64 -2.2 -10.65
MIND $4.25 0.39 1.19 -42.04 -67.05-36.34
MXWL $4.75 1.45 2.01 -32.67 -45.77 -13.99
STLY $3.10 1.02 0.79 2.99 21.09 -8.97
TWMC $3.51 0.64 0.68 2.04 -3.58 14.6