Not All Net/Nets Are Buyable

 | Feb 01, 2012 | 12:30 PM EST
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On Monday, I wrote about some of the recent "graduates" from net/net land. Today I'll focus on some of the companies that are currently trading below their net current asset value (NCAV).

By way of a refresher, and for new readers, the calculation for identifying net/nets is fairly simple: Subtract total liabilities (including minority interests and preferred equity if applicable) from current assets, and then compare that with the company's current market cap. If the market cap is below the number you have calculated, you've found a net/net. Ben Graham, who developed the technique, took it a few steps further and was a bit more stringent about those he considered investable, but we'll save that discussion for another day.

Given the run-up we've seen in the markets lately, it's not surprising that the number of net/nets with market caps greater than $100 million is rather low at this point, at 10. Their average size is also rather small, at around $150 million. Over the past couple of years, we've seen some bigger names at times, such as Ingram Micro (IM), Benchmark Electronics (BHE), Skechers (SKX), Tech Data (TECD) and Movado (MOV), to name a handful, but that's not the market environment we are in at this point.

The biggest net/net I'm finding now, besides FormFactor (FORM), which was mentioned in Monday's column, is the data-storage company Imation (IMN). At first glance, on the basis of balance sheet alone, Imation looks interesting. But since it is currently trading at just 0.73x NCAV and just below net cash of $6.21 per share, Imation could be the epitome of the phrase "some stocks are cheap for good reasons." Imation has not had a profitable year since 2006, and the company has been burning cash. A return to profitability would make shares soar, but that remains to be seen. This is the classic case of a net/net whose best hope at this point is to be acquired. There may indeed be some value here, but I'm cautious, lest I fall into the much-dreaded value trap.

Westell Technologies (WSTL) is a fairly new addition to net/net land. Currently trading at 0.92 times NCAV, the company ended the year with $142 million (excluding restricted cash), or $2.14 per share in cash, which is very close to the current share price. The company is in transition, having recently sold its Conference Plus and Customer Networking Solutions businesses. This past year, Westell bought back 1.7 million shares of stock, a positive in my view. Expectations from the few analysts who cover this name are that the company will be marginally profitable in 2012 and 2013.

Other current net/nets include Maxygen (MAXY), NeoPhotonics (NPTN), seemingly perennial net/net retailer Tuesday Morning (TUES), Aviat Networks (AVNW), K-Swiss (KSWS) and Opnext (OPXT). Certainly not a very broad or compelling list of names at this point, but so it goes in net/net land. 

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