Cash remains your best friend. Momentum is red… Every sector is experiencing dramatic downturns in momentum. There’s really no place to hide: Except for cash.
If you think I’m kidding, the Invesco DB US Dollar Index Bullish Fund (UUP) is up 7.43% this year. This fund tracks the performance of the dollar against a basket of its rivals like the Swiss France, Euro, and Japanese Yen.
As interest rates rise and sovereign debt woes threaten emerging markets, money is pouring into dollar-denominated assets. The dollar is soaring as a result. In fact, the U.S. dollar fund is basically keeping up with inflation.
That sounds like a paradox, but since the dollar remains the cleanest shirt in the laundry, the UUP is at its highest level since the 2020 crisis. Now, I think this rally will break. And I want to start putting SOME money to work because cash can be very boring.
So, I want to talk about those liquidation stocks that piqued my interest.
Carmen Finds a Winner
I referenced the movie Other People’s Money this week. In the 1991 film, Danny DeVito’s corporate raider character lays out the basis of liquidation value investing. Buy a company that has assets – real tangible assets. Real estate, land, machines, and more. And if they have very little debt or none at all, that’s a dream.
DeVito’s character has a machine named “Carmen” that looks for these companies on a regular basis. So do I. But I call my computer “Washbucket.”
So, Washbucket and I went through the list of stocks that have solid Z-scores (no threat of a credit event), little debt, and trade under the value of their combined assets. In the movie – DeVito finds a stock worth $25 trading for $10.
But Washbucket nailed it with this one: Hurco Companies (HURC). Forget what they do for a moment.
The stock trades for 82 cents on the dollar of its tangible book value. This $28.72 stock is worth $34.88 if the company liquidated tomorrow. They trade at a low buyout enterprise multiple of 7.6x (meaning it’s a cheap takeover target).
And the Z-score is sitting at 3.56. It’s profitable. It has a debt-to-equity ratio of just 0.04x, the F-score is 7, the margins are profitable. Oh, and it’s a very good business.
What is Hurco Companies?
Hurco Companies manufacture small CNC machines for manufacturing shops across the country. Although they operate on cyclical demand and might experience weakening demand due to recessionary concerns, I want you to understand that there’s value in the business.
CNC machines have a surprising secondary market with strong demand and little price discovery. My brother in law worked in the resale business of these machines for years, so I’m quite aware of their worth in the event of a need to dump inventory. It’s surprising.
Liquidate the company tomorrow and this stock is worth 22% more than it closed on Friday. Business is surprisingly good, as the firm experienced 26% growth during the first quarter in revenue. Even modest analysis of cash flow could put this stock’s value in the $30s or $40s, according to some analysts. I’m not worried about any of this.
This company owns lots of assets. Machines, buildings, land, STUFF. And their total assets of $334 million heavily outweigh their liabilities of just $95 million. They’ve got $90 million in cash. There’s no long-term debt.
Shareholder equity stands at $239 million. All because they own real, tangible things… and all of them are worth money, especially in a rising inflationary environment. I see a sale on this company.
How to Trade Hurco (HURC)
Now, this isn’t something that I’m going to rush in and buy right now. Instead, I’d break up my orders in various buckets.
My first target to buy the stock would be at roughly $28 if we continue this downward cycle in momentum. My next target would be $25. And then, I’d look at $20 in an extreme scenario.
This would set my cost basis at $24.33. At that cost basis, my position would be trading at roughly 70% of its liquidation value. I’m happy to be patient over the long term.