by Jea Yu
CPS: Cash Per Share Plays
I’m not a big fundamentals guy, as I see a company and its stock as two separate entities. However, there are times when a stock may be considerably undervalued compared to the sector or unto itself due to a fundamental news event. While assets for a company such as backlog, inventory, patents, receivables, etc. can by subjective, there is one thing that is always king – cash.
The basic undervalued stock is one that is trading below its cash per share value. The exception is banks and financials, because these entities can fiddle with the cash position in all kinds of wicked ways. Technology companies, biotechs, pharmaceuticals, mining companies, and so forth are good candidates to filter. The next thing you want to factor in is the debt and cash burn rate. If the debt is not overwhelming (that rules out REITs), and the company has a positive cash flow, then it meets the mark.
Usually I don’t set out actively searching for undervalued plays, which I probably should. I will often come across them when they dump on earnings news, merger fallouts, or FDA rejections. This immediately thrusts them into the limelight on panic selling accompanied by huge volume. I love getting into dumpers that fall to, or especially under, their cash per share with a positive cash flow. If the company has a negative quarterly burn rate, that can be a little more hairy in the long run, but we are working for scalps anyway.
Use the cash per share price level as a solid support area on any dumper that trades below, but not at, book value. Book value is too subjective and is not the same thing as cash per share. In fact, this is a good scanning technique to plug into a market scanner. Scan for stocks that are trading at or below cash per share. Throw out any banks, insurance companies, REITs, mutual funds, and financials in general.
That list of stocks will give you something to start with, and then you can pull up the daily, weekly, and monthly charts and compare them to the sector. If the stock is a laggard in a strong sector, then that is even more favorable.
Sector Laggards
Stocks that are trading weakly compared to their respective sectors should be kept on the radar as well. These can often be laggard stocks that will soon see money flow once the leaders become overbought. The way to compare is to take the top two or three sector leader charts and see how the undervalued stock is performing in regards to trend and Bollinger bands, and how it is positioning relative to the 50- and 200-day moving averages. If the top three sector leaders are all trading in an uptrend on the weeklies, and above the monthly 15-period moving averages on the monthly, then that sets the bar. If the laggard stock is down-trending but starting to turn on the daily stochastics, this sets up a good laggard play. Keep in mind, if the leaders are all profitable and the undervalued stock in question is bleeding cash, that is key reason for it to be laggard. This goes back to cash per share. The closer it is to or below cash per share, the better the value of the stock, even if it is a pig. Couple this with a daily mini pup tightening while everyone else is in uptrends at their daily upper Bollinger bands, and you’ve got a good laggard play to consider before the market notices and brings it back up to value.
Sexy Sectors
Every market has its share of sexy momentum sectors in play, even in bear and down-trending markets. In fact, the weaker the market, the more a sexy sector makes itself apparent. These can be solars, shippers, financials, biotechs (with bios, the novelty plans can branch off into a certain disease factor, like prostate issues, vaccines, Alzheimers’, etc.). If the sector is white hot and squeezing higher, then actively look for the laggards even if they appear to be no good, as a sexy sector will actively reach the lowest tiers eventually. Your goal is to get in on them just before or at the very moment of the momentum surge. One thing to keep in mind, however, is that once the momentum hits these kinds of stocks, it’s usually a sign of peaking in the sector. In the markets, it’s not so much the cream rising to the top, but the lowliest stocks floating to the top just before the sector gets flushed like a toilet. In the end, bag holders are left. Don’t be one of them.
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