's Chance in Hell

A company which is worth less on Wall Street than its cash in the bank would seem to be the very definition of a value stock. The business could be simply closed down, the cash distributed, and the shareholders would come out ahead. Such companies are rare. But they are regarded neither as objects of beauty nor of admiration.

A market capitalization equal to cash on hand presumes that the business itself is worth nothing. What about when a company has a stock market capitalization less than its cash; is the business of negative value?

Otherwise a virtue, excess cash is as surrounded by question marks as an effeminate scoutmaster., for example, “brings together a blizzard of content for geeks and girls with attitude,” explains a review on MoneyCentral Investor. One of the websites operated by the company is called “ChickClick.’ Alert to the journalistic possibilities, Addison, my keen associate, went thither.

“The site has a lot of goofy girl talk” Addison reported, “but no visible means of support.”

Nor does the genius of its business strategy jump at you when you look at the numbers. It lost $4.62 per share last year…or about $50 million, and now trades at 53 cents a share, giving the company a total value of $6.3 million.

Yet, has $22 million in cash. is one of 70 companies listed in a Barron’s article this week. At risk of trivializing the sturm and drang of the last few years in the world, these companies raised a lot of money when investors were giving it away. They subsequently lost millions in flaky business ventures and are now ignored by Wall Street. But a few – either through prudence or incompetence – still have cash left. Could it be that among these stray cats and dogs are some decent value investments?

We find, for example, that Be Free had nearly $150 million in cash at the end of March, against a recent market value of only $83 million. Viant – worth less than $100 million on the market – had more than $171 million in cash.

I mention these two because John Rolfe, of Argand Capital in New York, believes they are worth looking at.

“Be Free builds, manages and maintains Internet-based affiliate marketing programs,” says the MoneyCentral summary. Whatever they do, they manage to lose money at it. The figures record a loss of about $2.83 per share
last year. Shares trade for about half that amount. Indeed, the company is not a profit-making business, but an anti-business, destroying capital at the rate of more than $10 million per month. But, as noted above, at the end of March, it still had $147 million to go.

Viant, meanwhile, is an Internet consulting firm. It lost 74 cents a share last year, and sports a net profit margin of minus 33.8%. Total losses last year neared $100 million. What is Internet advice from a firm such as this really worth? I don’t know, dear reader. Yet, it’s current stock market value is $114 million…while it has that amount, plus about $50 million more, in the bank.

If you could get control of the company, you could fire everyone, turn off the website…and pocket a cash premium. But it isn’t that easy. “In a lot of these cases,” observes Robert Chapman of Chapman Capital, “the cash is merely a mirage. By the time you get to it, management has sucked it dry.”

Whatever the opportunity in these companies, the risk is obvious: that the jaws of darkness will devour up the cash before a workable business is discovered. Not an insignificant worry.

Bill Bonner
Paris, France
June 15, 2001

*** “Another day, another avalanche of “earnings- shortfall” announcements,” reports Eric Fry from Wall Street. ” From semiconductor producers to office furniture manufacturers, corporate earnings are heading on a southerly course.”

*** The course of true stock market investing never did run smooth. In fact, it seems designed to frustrate people. First, it builds their hopes up – with profit expectations bright and loud as a bolt of lightning, to borrow from Shakespeare… Then, ere a man has power to say: behold!…and it all comes to confusion.

*** Information tech was supposed to boost profits. Instead, profits are disappearing. But, not to worry… things were to be better in the ‘second half recovery.’ Uh…Midsummer’s Eve is less than a week away…and the second half begins scarcely a week later. Yet, corporate executives report that they see little improvement coming in the 3rd quarter. Maybe in the 4th?

Eric’s report:

– The tech-laden NASDAQ index fell 3.7% yesterday – its sixth loss in seven sessions. The Dow dropped 181 points and closed at 10,690.

– It’s pretty clear, folks, we just aren’t buying stocks like we used to. Then again, not too many stocks are giving investors much of a reason to buy. Discount broker Charles Schwab warned it would miss earnings estimates… they suffered an 11% decline in customer trading in May.

– Whimsically describing the indebted American consumer,’s Mary Levai writes, “Now starring in ‘I’ll Think About That Tomorrow’ U.S. consumers pitted against the dark forces of shriveling net worth.” If panic sets in and consumers become savers, Levai predicts such a trend would “set the stage for a sobering replacement: ‘The Incredible, Shrinking GDP.'”

– Corporations aren’t in any better shape, debt-wise. “The worst is yet to come for the US leveraged finance market,” Moody’s Investor Service predicts, “high-yield default rates are not likely to peak until early next year. Current projections call for the default rates of US speculative-grade issuers to rise from the current level of 7.5% to a peak of 10% by March 2002.”

– Every summer Manhattan’s well-sandaled crowd heads out to the tony beach-side hamlets in the Hamptons. But in this, the first post-dot-com era summer, noticeably fewer vacationers are showing up. In their place, a growing population of “For Rent” signs. “We’re seeing signs for the first time in very posh neighborhoods,” real estate agent Judy Desidario tells the New York Times. “So it’s a little bit of a panic.” Agent Diane Saatchi moans, “I’ve had ‘For Rent’ signs in my storage area for 10 years and never used them before.”

– Diane, if you’ve lost the instructions, just remember these four steps:

Grab sign.
Pound it into front lawn.
Pray for phone to ring.
If all else fails, e-mail Greenspan to slash interest rates to 0%.

– While Hamptons homeowners struggle to find renters, Matsushita Electric reports that it struggles to sell just about everything it makes. Matsushita, the world’s largest consumer electronics maker reported that it would likely post its first quarterly operating loss since listing on the Tokyo Stock Exchange in 1949.

– “The worldwide slowdown in information technology has hit Matsushita hard,” the Wall Street Journal reports. “Demand and prices are falling for key components in mobile phones, computers and other high-tech gear.”

– Unmistakable deflationary trends – like falling PC prices and rising unemployment – dwell in our midst. But that doesn’t mean that inflation’s voice is silent. Gold, that yellow dog, gained another $3.30 yesterday to $276.

– If history is any indicator, gold is set to rally in a big way. “Between December 1974 and November 1976,” says John Myers, our resident expert on all things Au. “The central bank cut rates seven times — a total discount of 2.75%. And after a lag, the price of gold jumped 405% between August 1976 and December 1979.”

– And then again… “in the 1980s when the Fed went on another rate-cutting spree the same thing happened. Between November 1984 and August 1986 the Fed initiated seven cuts for a total reduction of 3.5% — and the price of gold nearly doubled. Now the Fed has cut rates five times for a total reduction of 2.5% — and more cuts could be on the way.” Will the price of gold be far behind?

– Love is blind. In a Lexington-line subway train crammed full of working stiffs – including yours truly – a couple of amorous teenagers “sucked faced” all the way from 14th street to Grand Central this morning. The rest of us did not.

*** The rally on Wall Street may be over. We’ll know soon. Meanwhile, the euro has moved up slightly, after falling below 84 cents. The dollar may have seen its highs for this cycle too – it fell sharply yesterday.

*** “The dollar’s run is coming to end,” says Kevin Klombies of IMRA – a charting service used by members of The Daily Reckoning Blue Team. “But not quite yet… Yesterday’s action was enough to clean out a few ‘stops’, but it will take a decline by the US $ Index through 116 to break this bull’s legs.”

*** Must the stock market – and maybe life itself – disappoint people? You work hard all your life to make things better for yourself… only to die in the process. “When I bought the place,” a chateau owner once said to me, “it was a tumble down ruin. I spent 20 years restoring it. Now it is in pretty good shape…and I am a tumble down ruin.”

The Daily Reckoning