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. :
Who likes licking stamps? Or waiting in line to buy them? Not many.
Nonetheless, people still do this – to the dismay of 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, is in the process of a major restructuring. The company
is diversifying into other businesses, such as helping online merchants
manage large volumes of

returns, the processing of overnight shipments and
the secure delivery of tickets, travellers checks and coupons over the Net.

But the company has the necessary financial resources to make the changes.
The cash position is a hefty $333.6 million.

The 52-week price range is a stunning $2-5/16 – $98-1/2. The current stock
price is $2-23/32 and the market cap is a lowly $133.5 million. The average
daily trading volume is 792,000. :
The company is a leader in the online loyalty marketing industry,
which was bolstered with the recent acquisition of CyberGold. So far, the
company has an opt-in database of about 15 million members. This offers
highly targeted marketing.

The company is undergoing a restructuring. About 29% (or 120) employees
will be laid off, so as to reach profitability quicker.

The company has about $120 million in the bank and the market cap is $83.6
million. The 52-week price range is $1-3/4 to $97-11/16. The current stock
price is $2-27/32. The average daily trading volume is 607,590. :
The company is a portal that focuses on the so-called Generation I
population. According to Media Metrix, the site is the 26th
highest-trafficked on the Web. In fact, the site has been able to attract
traditional advertisers, such as United Airlines, Visa and Ford.
Yes, the company has been taking restructuring moves. Recently about 15% of
the workforce was laid off (50 employees).

The market cap is $46.9 million and the cash position is $61.3 million. The
52-week price range is $1-1/16 to $20. The stock currently trades at
$1-1/4. The average daily trading volume is 67,318.

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