Some Stock Bargains - Negative Enterprise Value!

Enterprise value is market cap of the stock plus any net debt minus cash and equivalents. A company can only have a negative enterprise value if its cash balance (including short-term marketable securities) exceeds the entire market value of the stock.

In other words, if you shut down the company and got nothing for the plant, property and equipment, inventory, and all other non-cash assets, you'd still make money off the cash.

FACT is a company that has a market value of $234 million, cash and marketable securities of $344 million, no debt, but about $36 million in lease and other long-term liabilities. If you include all these numbers, the EV ($234 million - $344 million + $36 million) is negative $74 million.

The $344 million in cash and short-term marketable securities represents $14.30 a share. The cash portion of that $344 million is $288 million, so even if you assume that the short-term marketable securities go to zero, you have $12 a share in cash sitting on the balance sheet. Facet was spun off in December from PDLI.

To be sure, Facet has no commercial products at this point. The company's pipeline currently contains five products with a focus on multiple sclerosis and oncology. Two of Facet's products are currently in Phase II of the drug pipeline, and the company has strategic collaboration on both of them with BIIB and BMY.

Facet doesn't have any revenue-generating products yet and sports a short history as a separate public company, so Mr. Market is obviously concerned that the company may burn through the cash before realizing any commercial success from any of its products. This is a legitimate concern, especially in the pharmaceutical business.

But both the Phase II products are showing positive test results, and the company is working with two major drug companies in Biogen and Bristol. And the most recent quarterly results barely showed any depletion in the cash level. The slightest hint of positive news could send this stock soaring due to the cash-rich balance sheet. In the meantime, noted value investor Seth Klarman is holding more than 17% of the shares -- if you have to pick a horse to back, you could do a lot worse than Klarman.

Another is ATV, which sells consumer products in China through television and a direct sales platform. Think of the company as part QVC, part Avon, part catalog and just about any other sales platform you can think of. The company sells all kind of stuff to bookstores, pharmacies, department stores and specialty retailers, including cosmetics, cell phones, auto supplies, cell phones and household goods.

The market cap is $117 million and net cash is about $176 million, so we have a $4 stock with $6 a share in cash. Two months ago you could have bought the shares for about $1, so the company is not the screaming bargain it was.

As you might expect, 2008 was an unprofitable year for Acorn, but the company did manage to produce free cash flow of $18 million. There is no indication that the company is burning cash. And with such a wide net of distribution channels, the company can easily reach the Chinese consumer. If shares just traded for the cash alone, that would mean a 50% return from here. A caveat -- this one is pretty thinly traded, so be mindful of wide bid-ask spreads.

When you find a stock with a negative enterprise value, you have a built-in catalyst on the balance sheet. Of course, the market has to see that the business is not going to quickly burn through the cash -- if that happens, the investment is no longer a bargain, but a very sneaky value trap. The two businesses here seem to have business models that can get through this recession; if they can, they could add a nice jolt to a portfolio's performance.