As Warren Buffett has said, the three most important words in investing are "margin of safety." Although small-cap companies offer the highest potential reward -- small-caps that graduate to large-caps offer multiple 1,000% returns -- they also are most likely to fall apart and become worthless.
At Stockpickr we keep track of, and update regularly, a portfolio of
. These are stocks with market caps of less than $1 billion, P/E ratios of less than 10 and little or no debt.
For whatever reason the market has abandoned them, but they often are candidates to be acquired or bought up by the large mutual funds once Wall Street recognizes the potential of their earnings.
Focusing on little debt ensures that liabilities won't eventually take over and destroy the company. This gives us -- to some extent -- a margin of safety. In addition to the link above, you can find this portfolio and other similar portfolios in our
section on Stockpickr.
is one of the names on this list. The stock is significantly off its 52-week high of $78, a level I believe it can easily reach again over the coming 12 months.
FreightCar agrees with this thesis, as it recently used its cash to announce a $50 million buyback program. Looking at the basic numbers, the company has a market cap of $743 million, but subtracting out its $184 million in cash gives it an enterprise value of just $559 million. That's nothing compared with its $180 million in cash flows. That means the company is trading at just 3 times cash flows.
The rail-car industry is very cyclical, and, in fact, FreightCar's backlog of rail-car orders has gone down significantly lately. That said, the company is the leader in this space, and the aging fleets of many of the railroads guarantee that orders will be forthcoming.
Analysts currently expect the company to earn $6.22 a share in 2007. How have analysts done when predicting prior quarters? The company has beaten analyst expectations for the past four quarters in a row.
FreightCar America (RAIL)
I believe part of the reason shares of FreightCar sold off in May was because activist hedge fund Pirate Capital is being required to give up its position in the company due to redemptions. The company is also a candidate for a short squeeze: It would take nine days of nonstop covering to cover all the shares short at the current volumes.
Super hedge fund
( ASPV) is also on our list of small-cap value plays. The company has a $693 million market cap and $228 million cash in the bank with no debt, giving it an enterprise value of $465 million. Combine that with $126 million in cash flows and you get a company trading at just 3.5 times cash flows.
Meanwhile, analysts expect the company to continue its strong growth, forecasting revenue to increase from $212 million in 2006 to $237 million in 2007. They also expect the company to earn $3.45 per share in 2007.
Aspreva also shows up on the Stockpickr list of
, as well as a list compiled by Stockpickr member "BamBam" of
stocks. These are names that satisfy the conditions of Joel Greenblatt's successful investing book
The Little Book That Beats the Market
, in which he recommends buying stocks with low multiples over cash flows and high returns on equity.
The list of 25 dirt cheap small-cap stocks includes
( AVTR) and
. For the full list of small-cap value plays on Stockpickr,
To keep track of when we update the list (approximately every week), sign up and bookmark the portfolio by rating it with four stars.
Stockpickr tip of the day
: Several Stockpickr members keep track of the "magic formula" mentioned in Greenblatt's groundbreaking book. To find these portfolios, go to
and type in "magic."
To see Greenblatt's portfolio,
To see the portfolio of Greenblatt's sister, who runs several hundred million dollars in her own retail-focused hedge fund called Saddle Rock Capital,
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.