Revisiting Some Net/Nets

 | Jan 30, 2012 | 1:17 PM EST
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The last time I wrote about one of my favorite deep-value-investing techniques, finding companies that trade below their net current asset value (NCAV), some fairly interesting names were at or near the top of the list in terms of market cap. Fast-forward four months, and at least some of them have graduated and no longer trade below NCAV. Typically, when that happens, it's a positive, because the price has run up, bringing the market cap back above the companies' NCAV. That's what you hope for when buying net/nets.

Benchmark Electronics (BHE), which has bounced on and off the list over the past couple of years, has once again left net/net land. Shares are up 33% since late September, and the stock now trades at 1.2x NCAV. That's still not expensive, and the quality of Benchmark's balance sheet is still very good. The company ended the third quarter with about $254 million, or $4.33 per share in cash, and just $11 million in debt. Benchmark still trades below tangible book value per share, at 15x trailing earnings and about 16.5x 2012 consensus estimates. That might not seem cheap, but for a company trading close to NCAV, it's still interesting. In all the years that I've been researching net/nets, profitable ones of Benchmark's size -- market cap of $986 million -- have been few and far between.

ModusLink Global Solutions (MLNK), perhaps more well-known previously as CMGI, has also moved to greener pastures. Shares are up more than 57% since my September column and now trade at about 1.5x NCAV. ModusLink has recently been involved in a proxy fight, and all of the attention and hope for change at the company have no doubt helped push the stock higher. The stock trades just above tangible book value and had $111.5 million, or $2.58 per share, in cash and no debt as of the end of the first quarter.

FormFactor (FORM) remains trapped among the downtrodden in net/net land. Shares have fallen 21% since my September column, and this company is more typical of the net/nets I've seen over the years: losing money, but dripping with cash. FormFactor operates in the very tough semiconductor sector, and investors are shunning the company and others in the same boat. The company ended the third quarter with $316 million, or $6.23 per share in cash and short-term investments, and no debt.

Currently trading at just 0.79x NCAV, the company has a negative enterprise value to the tune of -$56 million. Put another way, shares are trading below net cash. Theoretically, this means that the market is paying investors to buy shares. Of course it's never quite that easy, and that view is relevant only if the company is able to stem the bleeding and slow down the cash burn rate.

Interestingly, shares were downgraded last week by Citigroup to Neutral from Buy. Of course, the downgrade itself is not the interesting part; the fact that Citigroup is covering this $250 million market cap company, while so many others, bigger in size, lack any analyst coverage these days is what surprises me. The company was also on fellow RealMoney contributor Tim Melvin's shopping list back in November. This is one to watch.

I'll be back later this week with some current net/net names.



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