Many small tech and tech supplying companies that have cashed in on the popularity of smartphones and electronic equipment are sitting on hordes of cash, potentially creating a large margin of safety for investors.
Omnivision Technologies, Richardson Electronics, and AVX Corp are a few of the companies that stand out. Each of the companies on the charts below has a large margin of safety, as per Ben Graham. Benjamin Graham, the famed value investor, was a big fan of trying to find companies with high current assets to liabilities ratios.
Basically if the company could pay off all of its liabilities with current assets, than there were no loss to investors as long as long term assets existed. And considering the volatility of these smaller, more cyclical companies, a bit of safety is always a good thing (see Chart 1).
Some of these companies have very low Price to Tangible book values (book value that does not consider intangibles and goodwill as assets), close to 1, with many holding much of their assets in current, liquid assets (see Table 1 and 2).
OmniVision, which makes cameras for smartphones and small devices and is a supplier to Apple, was recently punished by investors and analysts alike as it was discovered that the company was not the sole provider of cameras to Apple’s iPhone 4S. The company is now entangled in a lawsuit with investors regarding its disclosures towards its relationship with Apple. These lawsuits tend to be very hard to prove. In any regards, the company has an extremely strong financial position with loads of cash and a good history of growing shareholder equity.
Richardson Electronics, which has sold the biggest and most profitable part of its business, is now flush with cash as shown in table 2, but is facing low earnings prospects. Through its investments and cash position, the company can cover 92 percent of all their liabilities while being valued at a price/tangible book value of less than 1 (see table 1).
AVX Corp - a bigger and more established electronic component company with a strong history - is also loaded with cash and yet has a low valuation. The company’s current assets less its liabilities are enough to cover nearly 64% of the companies’ market capitalization, pretty impressive…
The semiconductor and electronic component sectors are extremely volatile, and investors understandably demand a fair amount of safety to invest in the sector. What better way to feel safe than to invest in a company with a huge cash hoard? If you are looking to benefit on an increase in the sector valuation but still want a fallback, then these companies might be an opportunity.