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Internet Cash Cows

A few months ago, a CEO of a once high-flying Net company said to me, "Tom, I can't believe this market. There are companies that have more cash than their market caps."

Since then, there are even more companies in this category. The question is: Do these companies represent opportunities?

I think so. But, as always, you need to be wary. Low-priced stocks tend to stay low for some time. What's more, low-priced stocks usually have inherent problems - which can mean nasty announcements (and we know what happens to the stock price when this happens).

Okay, these stocks are not for risk-averse investors. Nor should investors put a substantial amount of their portfolio into these offerings.

When a stock sells below its cash value, it does represent an enticing arbitrage opportunity, though. In a sense, the company's operations are being valued at zero. For example, suppose a company has a cash balance of $100 million and a market cap of $50 million. The company could easily purchase all its shares - at a premium - and take the company private. In fact, since the company has a healthy cash position, a bank may even lend money for the purchase. Then, once the equity markets heat-up again, the company can reissue its equity back into the market place at a much higher valuation. Actually, this was a common thing in the 1980s, when companies engaged in leveraged buyouts. It was definitely extremely lucrative for such financial engineers as Carl Icahn, Henry Kravis and Mike Milken.

While I'm not promising you'll become the next finance mogul, I do think there are some interesting value plays. So, I did a screen on companies that have market caps below their cash positions. From this list, I used the following criteria:

Defensible Business Model: Yes, this sounds obvious, but the company needs to have an actual business that works. Of course, this is a subjective standard.

Cash of at least $50 million: For example, a company may have a market cap of $10 million and cash of $20 million. Well, it is likely that the cash will burn away. A $50 million benchmark seems reasonable for a company that is striving to reach profitability, especially if the company is already taking measures to reduce operating expenses.

Past Healthy Stock Price: Look for companies that have had much higher stock prices.

Trading volume: A stock needs some trading activity. I set the criteria at a daily average of 50,000 shares.

Here are the companies that look interesting:

ValueClick : The company is in the dreaded online advertising industry. Yet, the company has an interesting model; that is, advertising is sold - through a network - based on click-throughs. With online advertisers becoming more skeptical, the ValueClick solution definitely makes sense. In all, there are more than 14,000 sites in the network.

Interestingly enough, ValueClick recently announced that it would buy back $10 million of its shares. Such buybacks are rare in the Internet world.

ValueClick's market cap is $121.7 million and its cash position is $138 million. The 52-week range is $3 7/8 - $24. The current stock price is $4-11/16 and the average daily trading volume is 73,181.

Stamps.com : Who likes licking stamps? Or waiting in line to buy them? Not many. Nonetheless, people still do this - to the dismay of Stamps.com and its abused shareholders.

Actually, selling stamps on the Internet is a low margin business. In fact, there may not be any margins, since the customer acquisition costs are high.

However, Stamps.com is in the process of a major restructuring. The company is diversifying into other businesses, such as helping online merchants manage large volumes of



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