Stocks that trade at a low premium to cash can offer a great risk-return profile and an easy way to play a quick short-term pop once they are discovered.
One of my favorite trades is the "cash vs. market cap" trade and so far I have yet to lose money on it. The trick is to find stocks that are trading within 20% to 30% of cash value, with little or no debt, and with a profitable business. As you can imagine, that combination doesn't pop up often, but when it does it can be a great way to make a few bucks. Normally, I'm not a short-term trader, but with this particular trade I tend to make the exception because it is so low-risk and it only happens a few times a year.
It's so low-risk because when the markets fluctuate these stocks will sometimes trade right down with the market to the point where the cash on their books is equal to their market cap, but very seldom below that. In other words, your downside risk is strictly limited. The biggest risk is that the company will either (a) payout a big taxable stock dividend, or (b) be tempted to make a large acquisition because it has too much cash to play with. So buyer beware, there are some risks.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV