Small caps high cash

I used a stock screener at FinViz.com to pick out some cheap stocks by the numbers. They are very small cap stocks with low trailing price to cash flow or low price to book value. I will take a look at them one-by-one and post analysis on a few select ones to see if there are any good buys. Here is the list of cheap stocks:

Industry	Name	Tick
Electronics Wholesale	ADDvantage Technologies Group Inc.	AEY
Home Health Care	Almost Family	AFAM
Sporting Goods	Aldila, Inc.	ALDA
Processed, Packaged Goods	American Lorain Corp	ALN
Health Svcs	American Caresource Holdings	ANCI
Wireless	ARC Wireless Solutions	ARCW
Property Management	AMREP Corp.	AXR
Communication Equipment	Blonder Tongue Labs	BDR
Biotech	Bionovo, Inc.	BNVI
Financial	Broadway Financial Corp	BYFC
Savings & Loans	Central Federal Corp	CFBK
Scientific Instruments	Digital Ally	DGLY
Footwear	Exceed Company	EDS
Savings & Loans	First Bancshares	FBSI
Regional Banks	First Community Bank Corp of Am	FCFL
Machinery	Gencor Industries	GENC
Insurance	Hallmark Financial Svcs	HALL
Technology	Himax Technologies, Inc.	HIMX
Electronics Wholesale	Infosonics Corp.	IFON
Regional Banks	Independence Federal Savings Bank	IFSB
Bus Svcs	Innotrac Corp	INOC
Apparel Clothing	Joe's Jeans	JOEZ
Scientific Instruments	The LGL Group	LGL
Regional Banks	MBT Financial Corp	MBTF
Regional Banks	Monarch Community Bancorp	MCBF
Electronic Equipment	Emerson Radio Corp	MSN
Medicla Instruments	NeuroMetrix, Inc.	NURO
Life Insurance	National Western Life Insurance Company	NWLI
Medical Instruments	Pro-Dex Inc.	PDEX
Regional Banks	Park Bankcorp	PFED
Periodical Publishing	Private Media Group Inc.	PRVT
Specialty Chemicals	REX American Resources Corp	REX
Regional Banks	Savannah Bancorp	SAVB
Credit Services	Security National Financial Corp	SNFCA
Semiconductor	Tegal Corp	TGAL
Regional Banks	Tower Financial	TOFC
Semiconductor Equip	Trio-Tech International	TRT
Savings & Loans	Teche Holding Company	TSH
Internet Information	The Street, Inc.	TST
Music And Video Stores	Trans World Ent. Corp	TWMC
Auto Parts	Tongxin, International	TXIC
Insurance	United American Healthcare	UAHC
Regional Banks	United Security Bancshares	UBFO
Medical Appliances	World Heart Corp	WHRT
Regional Banks	Western Liberty Bancorp	WLBC
Communication Svcs	WPCS Int'l Inc	WPCS
Wineries	Willamette Valley Vineyards	WVVI

But just because a stock is cheap according to multiples doesn't mean it's a good buy. The first stock I looked at from this list confirms this.

Company: Joe's Jeans
What they do: Sell expensive jeans, retail and wholesale. In the $120+ range. They design the jeans and pay a manufacturer to sew them together.
Competitors: Many competitors in this industry. For example, 7 for all mankind.
Why can't somebody else do what they do: Joe's designs their jeans well, as evidenced by these generally good reviews:


http://www.yelp.com/biz/joes-jeans-boutique-san-francisco

http://reviews.macys.com/7129/325960/joes-jeans-honey-boot-cut-jeans-gigi-wash-reviews/reviews.htm


 I believe other companies can mimic Joe's success. Joe's has experience in the jeans field, but experience can be hired. They have a brand, but that is not too well known. I think they don't have much of a sustainable competitive advantage. But trends come and go, so maybe if they become a trend, the company could take off. But a general rule is to never invest in a conjecture. I don't know the first thing about fashion trends, so I am not going to put my money on a company hoping they go in style. It has to be about the numbers, or something that plays to the expertise of the investor.

Balance sheet:
Cash and equivalents $11.5 million
Inventory $24 million
Receivables, PPE $10 million
Payables $16 million
Net Realizable Asset Value, maybe $25 million

Net Income:
Trailing 12 months, negative $2 million
Trailing 36 mos, positive

Cut to the chase
Here is the reason I don't want to invest in JOEZ. Looking at their most recent quarterly report, they lost money on their retail sales, and they have upcoming lease obligations that increase from about 3.5 million per year to 4.5 million over the next five years. They have about 4 million options to grant, 6% of the total shares outstanding, which will probably be issued if the stock price rises. Right now many options are underwater so are not counted on the balance sheet. The reason the company has high cash is because it has a factoring agreement whereby it sells its accounts receivable. Not a bad thing, but it's not like the company is a cash machine on its own. Finally, the company has a profit sharing agreement with its top board member based on a 2007 licensing deal. It gives this guy 11% of its gross margin (Revs - COGS, NOT profit margin!) from 11 million to 21 million, and about 2% of all gross margin after that. With $80 mill annual sales, it's a slam dunk that gross margin will hit these levels, so the company is taking $1.6 million out of its annual profits to pay this licensing agreement. This is already a low profit margin business, and this licensing agreement will continue through 2017. So JOEZ is not a safe enough investment for me in particular. If I were a fashion aficionado and had inside information that Joe's Jeans would be promoted at the world-class fashion show in Milan, then I'd purchase some shares. But I'm not.

Remember, this doesn't mean the stock will go down or that it is a bad investment. It just means I am not comfortable enough with the company to put my money up for it.