You might not know this about me… but I am fanatical about music.
As a teenager, I diligently practiced for hours a day. In college, I got a minor in music – for fun. And I’m still serious about it… Hopefully someday (possibly 2013), you’ll hear a CD of my music.
I tell you this because right now, one of my favorite music companies looks like a ridiculous bargain… It has “net cash” of nearly $500 million. And it has a stock market value around $200 million.
This company sells for a nearly $300 million discount to its cash – and that assumes that its factories, equipment, and brand name are worth zero.
The thing is, the business is not worth zero. I have bought and relied on Roland Corp. musical products for over a quarter-century. Roland makes legendary recording studio equipment, keyboards, amplifiers, and much more. Roland’s products are always innovative and of great quality.[ad#Google Adsense 336×280-IA]Roland is not alone. I’ll show you where you can find 400 or more other Rolands out there in just a minute.
But first, let me explain what I mean by “net cash” of $500 million.
In short, I use what I call “net cash” to find a worst-case liquidation value of a company. My number-crunching assumes that the company’s assets are worthless. (And sometimes they are, but not in Roland’s case.)
When I use the word “cash” here, I’m really referring to “current assets.” That’s cash, plus things that could be converted to cash within 90 days – things like shares of stock, for example.
Those are the “current assets.” But that’s only half the equation when you’re looking for a liquidation value…
You also have to look at the debts. To get the “net cash” as I call it, you have to subtract ALL debts from current assets to get the net cash. (“Net current asset value” is a more correct description, but that’s a mouthful.) Again, we’re not giving any value at all to factories, equipment, or brand.
Can you believe that the stock is trading at a near-60% discount to its net cash? And can you believe that assumes that the Roland business itself is worthless? That is just crazy to me.
I haven’t done the specific research on Roland yet to see if there’s something I’m missing here. I just “screened” for stocks that were selling for less than their “net cash.” Roland was one of more than 400 companies that appeared.
Why haven’t you heard about these 400 companies?
Because these 400 companies trade in Japan…
Roland is a Japanese “small-cap” stock with a market value of $217 million. Analysts simply aren’t paying attention to Japanese small caps. Roland trades at just ridiculous valuations… It trades at a price-to-book ratio of 0.36 and a price-to-sales ratio of just 0.20.
Japanese small-cap stocks like Roland are some of the cheapest stocks on the planet.
A simple way to get exposure to Japanese small caps is through the WisdomTree Japan SmallCap Dividend Fund (DFJ)… The stocks in this fund trade at a price-to-book ratio of just 0.68 and a price-to-sales ratio of 0.33.
For comparison, U.S. stocks are three times as expensive as Japanese small-cap stocks. Japanese small caps would have to soar threefold just to be the same value as U.S. stocks… and U.S. stocks aren’t even that expensive.
I’m not recommending shares of Roland… It’s just an example of how cheap Japanese small-cap stocks are – many are trading at well below net cash – and why they should have a place in your portfolio.
— Steve Sjuggerud[ad#jack p.s.]