One of my hobbies is looking for seriously undervalued stocks. To accomplish this feat, I sometimes use a stock screener like this one from AOL. Looking for really cheap stocks, I'll sometimes search for companies trading very close to book value with little or no debt and some profitability. Normally, very few stocks meet all of these criteria. The ones that do are almost always boring and nothing you've ever heard of. Finding a brand moat -- a company offering a consistent, well-known, high-quality product -- using these screens almost never happens. That's why I was particularly shocked when I found Adams Golf, Inc. (OTCBB: ADGO) the other night. Before I tell you about it, I should warn you that it is an OTC stock under $5 and is potentially quite volatile.

As any golfer knows, the company is best-known for its line of hybrid golf clubs, several of which received rave reviews in the most recent issue of Golf Digest. For the quarter ended September 30 2006, total sales increased 47% to $15 million. While the quarter showed a net loss of 2 cents per share, for the 9 months ended September 30, the company has fully diluted earnings of 16 cents per share.

The most interesting thing about the company is its balance sheet. The market cap is tiny at $45 million, and the company has $11.7 million in cash according to the latest 10-Q, and a book value of $37.5 million with no debt. The book value consists almost entirely of current assets so it's probably a reasonably good proxy for its liquidation value.

So, Mr. Market is according the business a value of about $7.5 million. Does that make sense? I don't think so. The company is recognized as one of the most innovative golf club manufacturers going, and spends over $2 million per year on research and development. As any deep value investor will tell you, this sort of investment in the future is extremely rare among companies valued this cheaply. The company has a trailing twelve-months price/sales ratio of 0.65, compared to Callaway Golf Company's (NYSE: ELY) ratio of 1.The major risks involve the management and corporate governance. The shares are down from their IPO in the 1990's and according to the 10-Q, the company is still dealing with class-action lawsuits relating to alleged false claims made during the IPO. (Plaintiffs say the company did not disclose that illegal gray market sales of its products and an oversupply of golf equipment at the retail level were effecting its earnings). Also troubling is the number of options that CEO Oliver Brewer has been exercising. That said, since being made CEO in January of 2002, Brewer has made the company profitable, and shareholders have seen their stock soar nearly 400%. Only 51% of the outstanding shares are part of the float.

With such a small number of shares outstanding, a strong brand, and a beautiful balance sheet, I'll be surprised if the company is still public in a few years. Given the high cost of compliance with Sarbanes-Oxley, ADGO looks like a prime target for going private, whether that be through a private equity firm, strategic acquisition, or a management-led buyout.

(Disclosure: I owns shares of ADGO.)