Investing in a stock trading below net tangible book value can be a lucrative opportunity -- in theory, one could buy a company and then liquidate the firm's assets for a profit.

However, companies trading below tangible book value may represent a firm with deteriorating fundamentals, or possibly inaccurate accounting. Therefore, great risk is involved, although there is opportunity for great reward.

The following three stocks all trade below their net tangible book values. We are not recommending the names, but rather present them as a stepping stone for further investigation. It's possible these intriguing stocks will fit well in a properly diversified portfolio.

Cooper Tire & Rubber (CTB 9.09)

Cooper Tire & Rubber focuses on the manufacturing of replacement tires in North America and has a growing international presence.

CTB has plummeted 65% since June 2007. The 81% advance in crude prices during that time frame has taken a toll on Cooper's gross margins due to the company's reliance on petroleum-based products (65% of its raw materials are petroleum-based). At the same time, demand has been sluggish due to the global economic slowdown. As a result, Cooper Tire swung to a second quarter loss, and is expected to post a loss for the year.

On the positive side, Cooper is expected to return to profitability in 2009, just as it has emerged from economic downturns over its nearly 100 year history. CTB trades at $9.09 per share, which is a significant 28% discount to its tangible net asset value of $12.68 per share.

Pros:

• Long history of nearly 100 years, and 36.5 years of consecutive quarterly dividends
• Hefty 4.6% dividend yield
• Has a good offering of low-end products that may be preferred due to the economic downturn
• People may need more replacement tires since they are postponing new car purchases
• Increasing foreign presence, including China
• Positive cash flow from operations during last five years; $252 million in cash, $325 million in available credit lines

Cons:

• Exposed to spiking crude prices, raw material shortages and economic slowdown
• Customers driving less due to record gas prices, may postpone tire replacements
• Highly competitive market
• High overhead, difficult to reduce output as demand falls
• Murky near-term profitability outlook

Zoran (ZRAN 8.52)

Zoran Corporation provides semiconductor chips for digital cameras, digital television, home theater and DVD players. The market's recent downturn has taken a toll on semiconductor stocks in general, and Zoran has been hit especially hard, with a decline of 71% from its 52-week high.

Zoran sports a tangible book value per share of $9.23, compared to its current price of $8.52. The caveat to its current book value is that $68 million of its $222 million in short-term investments are government guaranteed student loans, which have been negatively affected by recent credit market turmoil.

If Zoran's business deteriorates and the company is forced to sell its investments before maturity, Zoran may not get the price that is currently on its balance sheet.

In the near term, however, it does not appear that Zoran will have to dip into its short term investments -- the company has nearly $92 million in cash compared to its current liabilities of $91 million.

Pros:

• Zero long-term debt
• $92 million in cash nearly covers its total liabilities of $114 million
• Positive cash flow from operating activities
• CEO and cofounder recently bought 20,000 shares on the open market

Cons:

• Valuation of some short-term investments may not be accurate due to credit market turmoil
• Flat revenue growth in latest quarter due to slowing economy and weak consumer spending
• Highly competitive and rapidly changing market
• Spotty history of profitability on a GAAP basis

O2Micro International (OIIM 4.98)

OIIM is another beaten down semiconductor name. It creates circuits and semiconductor products for power management, mobile and security applications. It also provides systems security solutions in consumer electronics, computer, industrial and communications markets.

The Cayman Islands-based company has recently diversified its product offerings.  The company also holds good growth potential with products for LCD and LED displays.

OIIM has plummeted 72% from its 52-week high on fears that the company will be adversely impacted by the slowing economy.  The average analyst estimate of fiscal year 2008 EPS dropped to $0.47 per share from $0.98 per share in November.

OIIM's current price of $4.98 is a 9% discount to its net tangible asset per share value of $5.47.

Pros:

• Cash per share of $0.93 covers total liabilities per share of $0.63
• Positive cash flow from operations for last three years
• No long-term debt
• Inexpensive valuation at 0.42 price-to-earnings growth
• Relatively stable history of profitability

Cons:

• Competitive industry
• Recently gave weak third quarter outlook
• Faces macroeconomic headwinds, especially if consumer spending weakens
• Risk of litigation costs regarding patent infringement cases against several firms

Risk/Reward

A stock's downside risk may be limited when trading below net tangible asset value. However, the market is indicating that it doesn't like the company's prospects or accounting. As a result, plenty of companies trading below net tangible asset value have gone bankrupt, leaving their equity holders with little or no value.

Conversely, plenty of stocks go on to handily outperform the broader market.

Before investing in any of the stocks mentioned above, an investor needs to perform due diligence to make sure the stock's potential reward outweighs its risk. Further, an investor must ensure that their portfolio is well diversified and can handle the prospect of losing substantial value in their investment.

Given the heightened risk involved in owning these stocks at this time, it is prudent for investors to consider using stop-loss orders.

For investors with a well diversified portfolio and a healthy risk tolerance, we feel that Cooper Tire & Rubber (CTB), Zoran (ZRAN), and O2Micro International (OIIM) are names worth considering.

--Ryan McShane, Briefing.com