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This small cap stock looks seriously cheap

Sometimes you come across a stock that looks cheap beyond all reason. Often times, it’s an under-followed small cap company the market seems to have all but forgotten.

Case in point: Coventry Group (ASX: CYG), which has a market cap of just $116 million.

This diversified industrial products company sells fasteners and hardware to customers in Australia and New Zealand in a variety of industries, primarily in non-residential construction. The company also runs a hydraulics business serving customers in the resources industry in Queensland and Western Australia, and has a smaller business, Artia, selling cabinets and office chairs. Its newest unit, Managed System Services, provides IT services.

The case for investors

But what’s most intriguing about Coventry Group is that the company has $53 million in cash, nearly half its market cap, and no debt. This leaves the company in a good position to make strategic acquisitions to fuel future growth.

Even better, the company pays a fully franked dividend with a yield in the 7% range (and management has said it plans to continue paying dividends in this range). All while, the shares are trading for about 11 times earnings, an EV to EBITDA ratio of about 6, and a price to book value of just 0.8. Coventry Group also has a plan in place to buy back as much a significant number of shares between November 2012 and November 2013.

Past performance is no indication of future returns, of course, but it’s also worth noting that, over the last five years, Coventry Group has significantly outperformed the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO), not to mention typical investors favourites such as BHP Billiton (ASX: BHP), Telstra (ASX: TLS) and Wesfarmers (ASX: WES).  Simply click the chart for a larger view.

CYG vs. AXJO, BHP, TLS, WES

One for your watch list

Though CYG shares are very thinly traded, an opportunity like this is one many savvy investors will want to keep an eye on. You might want to put Coventry Group on your watch list today.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any of the companies mentioned in this article.

 

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