7 Stocks That Could Be 10-Baggers

In early October, 2002, I went to visit two guys who were running a small hedge fund of about $10 million. They had been short Ford (F) and GM (GM) and a number of other stocks.

I asked them what their view of the world was. I told them I was bullish, but they laughed and said, "That’s because you’re always bullish. When are you ever bearish?" They said, "It’s about to hit the fan. We are massively short everything. America is going down."

(As an aside, both of these guys are in jail now. One wouldn’t testify against the other, so he got the larger sentence. The other guy (who was actually the boss) will be out in a year or so. The crime had nothing to do with their hedge fund but with a currency brokerage firm they had been running for 20 years that turned out to be a massive scam. The incident above was the last time I ever spoke to them, and a few weeks later, I saw that the FBI had arrested them and about 30 others in a multiyear sting operation.)

The point is, the world was falling apart in October 2002. Criminals and sociopaths were slitting the throat of America in an attempt to make money on the short side. Back then, inflation wasn’t a worry but deflation. And "Helicopter Ben" was threatening to carpet bomb the economy with dollar bills.

How does one do that? By cutting rates. By backing debt at the esoteric parts of the yield curve. By bailing out failing banks. By opening the discount window to banks and lower beasts on the financial evolutionary curve. By even buying stock in a worst-case scenario.

At the time, there were about a dozen stocks trading for less than cash. In other words, they had, for example, $100 million in the bank and no debt, were profitable and had a market cap less than $100mm. A little company called TheStreet.com was an example of such a stock.

In December 2002, I wrote an article about these stocks for the now-deceased Street Insight, which was later folded into RealMoney Silver. People laughed at me. "They trade below cash for a reason. " I was mocked. Children at my kids’ schools spit in their faces.

Five years later, many of these stocks (for example, ValueClick (VCLK)) were up more than 1,000%.

Now it’s happening again. The same sickness that convinced people that our way of life was a life gone wayward has again spread its bacteria into our heads. So here are my five stocks that I think can double, and perhaps double after that.

None of these is Microsoft (MSFT) or Google (GOOG) or Research In Motion (RIMM). Those are the debutantes at the ball. What follows are the rejects that were never even invited to the party.

Adaptec (ADPT) makes storage products. It has a $383 million market cap and $400 million net cash. The company was GAAP break-even last quarter, and non-GAAP it made $5.7 million in income. So people can buy a profitable company right now and put $17 million in their pockets with the excess cash.

It may not be so simple, but it’s still dirt cheap with a margin of safety. Steel Partners
has been buying millions of dollars worth of stock in Adaptec.

HouseValues (SOLD) has $63 million cash, a $65 million market cap and a break-even to profitable business. Good play on any sort of housing snapback and zero chance it goes out of business. Uber-hedge fund Renaissance Technologies is one of its largest shareholders.

Forget Baidu.com (BIDU). Ninetowns (NINE) is the best B2B Internet play in China. It facilitates the online process of importing and exporting goods to and from China. It has a $69 million market cap and $115 million net cash. Again, Renaissance has been loading up on this stock.

Heelys (HLYS) makes those shoes with wheels. It has a $105 million market cap, $100 million cash and no debt. It’s growing huge in Europe and is about to introduce sneakers without wheels. If anyone knows where I can get a pair of those shoes with wheels, please tell me. Apparently the demographic that most wants the sneakers is men over thirty.

If you want a stock with cash flows, check out 4 P/E Crocs (CROX). But Heelys is interesting to me because of the cash levels. And once again, our best friends at Renaissance (a fund that was up 73% last year after fees) is long Heelys.

Premier Exhibitions (PRXI), with a $100 market cap, makes the Bodies exhibit. It also run the Titanic exhibits. There are $3 billion worth of Titanic artifacts sitting on the ocean floor. Premier happens to own the rights to all of those artifacts and has already excavated $100 million worth. There are issues with where the bodies are coming from for the Bodies exhibit, but Premier settled with the New York attorney general, and it may not affect the $17 million in cash flows Premier is generating from these exhibits.

Also check out Entertainment Distribution (EDCI). It has $40 million in net cash, and the company is yours for a meager $35 million. Three of my favorites -- activist investor Chapman Capital, Daniel Loeb’s Third Point and Renaissance -- have all been loading up on shares of this company, which is essentially trading for $0. And before I forget: It is EBITDA-positive.

Zapata (ZAP) has $154 million of cash in the bank and no debt, and you can buy the entire company for $135 million. Not only that, it had $2 million in operating cash flow last year, and Renaissance is a small shareholder.

Sure, all of these stocks are ugly. They look in the mirror, and all they see is scars from a lifetime of malnourishment and poor hygiene. Don’t put all your eggs in this basket. But all it takes is one 10-bagger, and all the rest can go to zero, and you’ve just made 45% on your money.


http://www.stockpickr.com/problog/733/