Ben Graham Style Assets...

03/24/2006 12:00 am EST


Paul Tracy

Editor, The StreetAuthority Market Advisor

Last July, we featured an article from Paul Tracy highlighting stocks with hidden assets; both Six Flags and Scott’s Liquid Gold have since more than doubled. While that’s no guarantee for future success, he again offers a new pair of hidden asset plays.

"Famed value investor Benjamin Graham once quipped: ‘When you can buy a dollar for 40 cents, you don't have to worry about what the stock market is doing.’ By its very nature, value investing requires leaning against the consensus view and looking for pockets of value in less glamorous sectors and not-so-obvious stocks. My staff and I recently scoured the investment landscape in search of other companies with ‘hidden assets’ that have not yet been fully recognized by Wall Street. Right now, here are two that meet our strict value criteria:

"Luby's (LUB NYSE) operates a chain of 131 casual buffet-style restaurants aimed at value-conscious consumers. The company is headquartered in Houston and a total of 123 of its locations are located in Texas. Its restaurant business has been improving of late thanks to the impact of management's 2003 restructuring plan. But Luby's isn't just a restructuring play the company still owns a tremendous amount of valuable, unencumbered real estate assets.

"Specifically, Luby's owns 91 of its 131 restaurant locations. It purchased many of these locations 40 or more years ago at prices well below what prevails today. Texas is one of America's hottest and fastest growing real estate markets. A surge in profitability for energy firms has pushed up the value of commercial real estate in the region. Luby's real estate is currently carried on the balance sheet at less than $50 million. However, that real estate alone could actually be worth well over half of Luby's $395 million enterprise value.

"Avalon Holdings (AWX ASE) operates in two basic business areas: waste disposal and golf course operations. Its waste management business hauls and disposes of waste from both commercial and government customers. It also operates two golf courses and related restaurants and clubhouses. Avalon has two main hidden assets: a rock-solid cash position and valuable real estate.

"Although its waste management business isn't fast growing, it does generate copious cash flows more than $2.7 million over the past year. Meanwhile, the company holds more than $11.3 million in cash on the balance sheet and has less than $240,000 in debt. That equates to close to $3 per share in cash net of debt an enormous balance for a stock that's trading at a price of $4.90 per share.

"Meanwhile, it owns the real estate, buildings and offices surrounding two full-sized golf courses located in Ohio. They are currently carried on the balance sheet for around $17.8 million. This real estate alone based solely on historic book value is worth more than twice Avalon's $7.86 million enterprise value. And in light of the recent run-up in real estate values, the current market value of that real estate is likely much more than $17.8 million."

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