In certain market environments, where value is tougher to find, I've got to look for upcoming talent in the minor leagues. In this context, the major leagues equate to net/net land (companies trading below net current asset value or NCAV) and the minor leagues represent companies that are not quite net/nets, but close.
I call them double nets, and don't be surprised if you can't find that silly term attributable to anyone other than yours truly. Double nets are companies trading at somewhere between 1x and 2x NCAV. They may be former net/nets whose fortunes have risen, but just slightly. They may be value traps, or dirt-cheap companies that have fallen off the radar and are not getting much coverage. But all else being equal, a company trading at that level may be worth a look.
The criteria that I use to identify double nets is the following:
- Market cap greater than $250 million
- Companies trade on a major exchange and are domiciled in the United States
- Trading at between 1x and 2x NCAV
- No financial companies
At this writing, there are 37 names meeting the criteria. Some are very familiar in double net/net land, but there are also some new entries as well.
As has been customary the past couple of years, there are still a lot of tech-related names. Heading the list in terms of market cap is Ingram Micro (IM), which is trading at just 1.05x NCAV. Other repeat offenders include AVX (AVX), Tech Data (TECD), Benchmark Electronics (BHE), Electro Scientific Industries (ESIO), Sycamore Networks (SCMR) and Tessera Technologies (TSRA). At some point, you've got to wonder whether 1x to 2x NCAV has become the normal valuation for some of these names.
One of the new additions is RadioShack (RSH), which is currently trading at less than 1.8x NCAV. This company has been hammered in recent years and shares are down nearly 70% since mid-October. This company has become a dinosaur in the eyes of man and, frankly, I have not set foot in our local store, let alone made a purchase, in years. The questions I have in a case like this are whether there is any life left, whether the pummeling the company has taken has been an overreaction, and whether there's any value in the assets.
RadioShack is trading below tangible book value and the balance sheet is decent, with $592 million in cash and $671 million in debt. Unfortunately, the company owns just two of its stores. But it does own 2,139 manufacturing and distribution centers. In terms of real estate assets that, in and of itself, is not compelling enough for me anyway and it's difficult to gauge the value here.
The company's fat dividend, which was doubled to $0.50 annually for 2011, represents a 7.2% yield. That suggests Mr. Market believes a dividend cut may be coming, despite what company management is saying. I've often been a fan of confident management raising the dividend, but this might demonstrate some overconfidence. Time will tell.
As intrigued as I am with this story, I'm not ready to commit any capital and need to do some more work on this one. Fellow contributor Tim Melvin has had been out in front on this, and has had some interesting thoughts on the name, putting forth an option strategy that will capitalize if this is indeed an overreaction.