Strong balance sheets a standout signal for investors

Shares in technology specialist Clover Corp and niche steel manufacture ­Bisalloy have both doubled, with good reason.

If a company has strong intellectual property and has hit on tough times, it can be a good time to jump in — just look at shares in technology specialist Clover Corp and niche steel manufacture ­Bisalloy, which have both doubled over the past few months.

Although there are company- specific reasons, when I advocated purchasing these stocks they were both very, very cheap, but they also had worked hard on strengthening their balance sheets and built up plenty of cash during the period of demand weakness.

A strong balance sheet is paramount in giving a company the ability to invest in growth. The dividend is a function of profitability and available cash. If it gets cut, it is not a big issue if the company has sufficient cash reserves.

Ironically, this seems to be the opposite of what has been happening in the big four banks. Westpac’s most recent capital raising and accompanying rate hike is the latest effort among the big banks to do anything to avoid cutting dividends and to keep those franking credits flowing to their super fund shareholder base.

Clover and Bisalloy have technology that gives them a competitive advantage. They have both cut costs, have strong balance sheets and now that there is evidence of increasing demand, shareholders are big beneficiaries.

Clover’s encapsulation technology is used to transfer vitamins and brain foods like Omega-3 fatty acids from tuna fish oil into powder used for baby formula, which mimics breast milk. Its shares declined from a high of 68c to as low as 17c only last month because infant formula manufacturers out of China are being wiped out because of contamination fears in that market.

But Clover’s shares are now trading at 35c, having initially been boosted in late September by double-digit revenue growth, $10 million in cash and the reintroduction of dividends.

Then a few days ago it announced more good news about its developmental product, which uses its technology on premature babies. The endeavour now involves Dr Brian McNamee, who was central in turning CSL into a global plasma giant.

Bisalloy Steel has been doing it tough as the construction boom in China falters. But its “Bisplate” product has a strong niche. The high-strength, lightweight product used in the manufacture of materials used in mining, like large dump trucks, dragline buckets and cranes. It also has a joint venture with a steelmaking giant in China.

Now that the Australian dollar is weaker and big customers like Rio Tinto are ramping up volumes, the company is in relatively rude health. Net debt has been reduced to minuscule proportions and it announced a 4c dividend, giving it a dividend yield of over 7 per cent, which we think is only the start. You can be optimistic if you aren’t weighed down by debt.

Richard Hemming([e-mail]) is an independent analyst who editswww.undertheradarreport.com.au, which provides investment opportunities in small caps.