Investors rarely get wonderful companies at cigar butt prices. Nonetheless, cigar butts can be extremely profitable investments. Those 'cigar butt' companies may not be the most wonderful companies on the ASX, but when average companies are available at bargain prices investors can benefit.
In February, to find companies currently trading at wonderful prices, I sorted ASX stocks over $300 million in market capitalisation by their Sonkin Ratio. The Sonkin Ratio is a robust version of the Price to Earnings ratio. The Sonkin Ratio is simply the Enterprise value of a company divided by its operating earnings adjusted for tax. It can be expressed as:
Sonkin Ratio = (Market capitalisation – Cash + Debt) / EBIT(1 – Tax rate)
The Sonkin Ratio is the multiple of tax-adjusted operating earnings an investor would pay for the stock. Or, how much an investor would have to pay for every dollar of operating earnings.
Here is a March update on 10 of the cheapest companies on the ASX and their Sonkin Ratios.
Gold Road Resources Ltd (ASX: GOR) – 2.98
Spotless Group Holdings Ltd (ASX: SPO) – 4.03
Nine Entertainment Co Holdings Ltd (ASX: NEC) – 4.57
Mount Gibson Iron Limited (ASX: MGX) – 4.95
Village Roadshow Ltd (ASX: VRL) – 5.49
Tribune Resources Ltd (ASX: TBR) – 6.49
Resolute Mining Limited (ASX: RSG) – 6.58
United Overseas Australia Limited (ASX: UOS) – 7.25
Seven West Media Ltd (ASX: SWM) – 8.00
Myer Holdings Ltd (ASX: MYR) – 8.06
Fortescue Metals Group Limited (ASX: FMG) – 8.2
Foolish Takeaway
These are 10 of the cheapest stocks on the ASX over a market capitalisation of $300 million. Of course, there are many and varied reasons for why they are cheap. Distinguishing between those that represent bargain prices, and those that are companies in terminal decline is the difficult part.
