What Will the Markets Do in 2014? Wrong Question

NEW YORK (TheStreet) -- Yesterday, someone asked me to predict how the markets would perform in 2014. I don't like that question, and wouldn't answer. He persisted: "What if I were holding a gun to your head?" I stuttered and stammered, because the truth is, I can't even pretend to know the future with any degree of certainty.

What I did tell him was that I am not finding a great deal of value in the market at this point and that sooner or later we will see a correction of sorts. Call me Captain Obvious, but that was the best I could do. Every year, we go through the same stock market-prediction drill, and it is nothing more than a fool's errand. How many times have we seen the standard prediction that the S&P 500 will rise 6 to 8% next year?

My time is better spent, I believe, in trying to identify cheap and overlooked companies. Sometimes they appear to be downright ugly, but some just may be diamonds in the rough. It's a difficult environment for value these days, and so you just have to dig a little deeper. I often start that process through stock screening and have used several value-based screens over the years that have unveiled some unlikely winners.

As the year comes to a close I am on the hunt for smaller companies that are awash in cash and have the following attributes:

  • Market capitalizations between $100 million and $5 billion
  • Cash and short-term investments greater than 30% of market cap
  • Price to book value below 2
  • Long-term debt to equity below 50%
  • Consensus estimates indicate profitability on a forward basis
  • No financial companies

This search currently yields nearly four dozen qualifiers. Perhaps not surprisingly, more than half of them are technology-related companies, including familiar names Benchmark Electronics (BHE) and AVX Corp (AVX), both of which are former net/nets (companies trading below net current asset value).

AVX ended last quarter with $1 billion in cash and short-term investments, which represents 43% of its current market cap. AVX also has a dividend yield of 2.6% and has no debt. Although the company has already bought some stock back over the years, it still has the wherewithal to have a more substantial buyback and further increase its dividend.

AVX ChartAVX data by YCharts


One of the more interesting companies to make the cut was Rosetta Stone (RST), which has become a household name in the language-learning business. The company is not profitable on a trailing 12-month basis, but is expected to generate a modest profit in 2014. It ended last quarter with $113 million in cash, which represents 43% of its current market cap.

Rosetta Stone may also be a year-end tax loss selling candidate, given its 33% drop since last May, which may provide some opportunity to scoop up some shares on the cheap. Much of that damage to the stock price occurred following a worse-than-expected earnings release early last month.

Just last week, the company announced that it will acquire Tell Me More, a European-based language learning software company, for $28 million. We'll see how that move pans out, as the company attempts to broaden its international presence.

RST ChartRST data by YCharts


Companies at the higher end of the market-cap spectrum for this search include Teradyne (TER), Convergys (CVG), Polycom (PCOM), Vishay Intertechnology (VSH), Magellan Health Services (MGLN), and MKS Instruments (MKSI).

Happy hunting!


At the time of publication, the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA,CFP® is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

  Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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