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National Home Health Care (NHHC, $10.92)
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National Home Health Care provides home healthcare and staffing services, primarily in New York, Connecticut, and elsewhere throughout the Northeast. Through its subsidiaries, the firm offers a wide array of home healthcare options, including registered nurses and personal care aides, as well as physical, occupational, and speech therapists. Additionally, the company meets the temporary staffing needs of area healthcare facilities.

With a tiny market cap of $62 million and a float of just 2.3 million shares, NHHC is rather illiquid, making it difficult for investors to enter or exit a position. Because the stock is very thinly traded (with an average daily volume of just 4,000 shares), there is often a wide spread between the bid and ask prices. Despite these issues, though, I believe the stock is worthy of additional consideration.

After posting healthy double-digit top-line growth rates from 2000 to 2003, National Home experienced a modest drop in 2004. The slowdown was short-lived, however, and revenues have been climbing steadily since then. In fact, the company recently reported record first-quarter revenues of $26.3 million, a +9% increase on a year-over-year basis. Management cited a recent acquisition and expansion of its services into several neighboring states as the primary reasons for the improvement.

At the same time, though, administrative expenses associated with the geographic expansion, as well as higher wages, took a bite out of net income during the period. In general, NHHC's earnings have slipped lower over the past several years as operating margins have contracted. Nonetheless, the company has remained consistently profitable for more than a decade.

Last year, shares of NHHC lost nearly one-fourth of their value. By contrast, the average stock in the home healthcare industry delivered a decent +6% gain. As a result, the shares are now sharply undervalued relative to their peers, as well as the broader markets.

After closely examining approximately twenty home healthcare companies, I came to the conclusion that NHHC is one of the most attractively valued in the group. Currently, the shares sport a gross profit/enterprise value yield of 76% -- more than double the 34% industry norm. Also, the firm's enterprise value of $44 million is 30% below the company's $62 million market cap, signifying one of the strongest balance sheets in the sector. With no long-term debt and more than $17 million in cash on the books, NHHC maintains an exceptionally strong current ratio of 7.6.

Though National Home does have institutional support from the likes of AXA Advisors, Legg Mason, and small-cap specialists Royce & Associates, less than one-fourth of the company's shares are owned by institutions, meaning the thinly-traded stock could rise sharply if large money managers suddenly became interested in the shares.

Finally, it should be noted that NHHC offers a generous annual dividend of $0.30 per share, which works out to an above-average yield of 2.8%. This should give value investors added incentive to wait on a rebound in the shares.

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Important Note: The above article was merely a small excerpt from a recent issue we sent to subscribers of our premium value investing service -- Margin-of-Safety Investing. In each issue of that newsletter, editors Nathan Slaughter and Paul Tracy deliver an in-depth look at a variety of other deeply discounted stocks that should provide investors with a solid margin of safety at current prices. To receive your copy of our most recent issue of Margin-of-Safety Investing, as well as other guidance similar to this twice per month, you'll need to subscribe to this publication. To learn more, please visit:
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