Slim Pickings in Net/Net Land

 | Apr 20, 2012 | 11:30 AM EDT
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One of my favorite deep-value screens is continuing to come up rather empty, offering few possibilities. I'm not at all surprised by this, because in rising markets, that is typical for net/nets (companies trading below net current asset value or NCAV). As a reminder, the formula used to identify whether a company is a net/net is: Current Assets – Total Liabilities (including minority interests and preferred stock if applicable). The results are then compared to that company's market capitalization in order to determine whether that name is a net/net.

I have seen market environments where there have been literally hundreds of net/nets. At this writing, I can identify just 14 with market caps greater than $50 million -- including nine that are in excess of $100 million. In the umpteen years that I've been researching, writing about, and investing in them, this is about as sparse as I have ever seen the "upper end" of net/net land.

Many of the usual suspects from my more recent columns on net/nets are still on the list. In fact, it's a bit like a line from the Eagles song Hotel California: "You can check out any time you like, but you can never leave." Names such as Imation (IMN) (trading at 0.77 times NCAV), and Form Factor (FORM) (trading at 0.96) may represent the new generation of perennial net/nets.

Another name that had been near the top in terms of market cap, Steel Excel (SXCL), may be on its way out of net/net land. Based on currently available fundamental data, the company appears to not only be trading below NCAV, but also at less than the value of cash and marketable securities ($323 million) on its books at year end. But since exiting the enterprise-class external storage business when it operated under its former name Adaptec, the company has not had significant operations, and is transitioning into a business focused on acquiring sports-related and oil-field servicing companies. To that end, Steel Excel has made a couple of recent oilfield service related acquisitions for companies operating in the North Dakota area, the last of which consumed $48 million in cash. Out of curiosity, I'll be watching this company moving forward. The company should still show a relatively a large amount of cash and securities in the books when the March 2012 10Q is released.

Incidentally, the last name that graduated from the list via spending some of its cash for an acquisition (thereby reducing its net current assets) was Audiovoxx (VOXX), which had been a net/net for years. Shares of that company have doubled since October. That has made fellow Real Money contributor Tim Melvin, a long-time VOXX holder, a happy man.

Finally, closeout retailer Tuesday Morning (TUES), which is popping up on several value screens these days given its level of coverage recently on Real Money, is making its own push to becoming a perennial net/net. The company has been on the list for much of the past three years, and is currently trading at 0.9 times NCAV. By conventional standards, it's not cheap, as it is trading at 36x trailing, and 20x 2013 consensus estimates. But by net/net standards it is interesting, trading at 0.63 times book, with $1.37 per share in cash, and no debt. If you spend enough time in net/net land, you realize that by simply earning a profit, you are different than the majority of net/nets, which are in the red.

I have owned shares of Tuesday Morning, which I've called a "rich man's dollar store" in the past, and visit our local store several times each year for my own version of "channel checks." Interesting merchandise -- empty store. That's just one location, though.


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