Everybody Loves a Comeback Story

 | May 18, 2012 | 2:30 PM EDT
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On Tuesday night, Colorado Rockies pitcher Jamie Moyer gave up one run over 6 1/3 innings and drove in two runs for his second win of the season. Not only is Moyer the oldest major league pitcher to ever win a game, he also beat the odds just by making the Rockies roster after missing last season due to Tommy John surgery. What's more, he's competing in the major leagues with a fastball that rarely touches 80 mph -- and winning. To me, this is Major League Baseball's comeback story of the year.

Out in net/net land, there's also a somewhat remarkable recovery unfolding in shares of Trans World Entertainment (TWMC), a specialty entertainment retailer that primarily operates mall-based stores under the f.y.e. (For Your Entertainment) brand. Selling video and music products, which accounted for nearly 77% of 2011 revenue, from mall-based stores has not exactly been a great business in recent years. In fact, the company posted losses in four consecutive years, from 2008 through 2011. Trans World was a member of the first net/net index I developed back in 2008, and in subsequent years there were times it looked as though the company would go under.

So, I nearly fell off my chair last week at the Value Investing Congress in Omaha, Neb., when Guy Gottfried of Rational Investment Group presented the long case for Trans World. It was a welcome surprise to hear managers talk about net/nets.

Although Trans World may never be a home run, the company has taken steps to right the ship, and reported Thursday its first annual profit since 2007. In the past five years, Trans World has simply gotten a lot smaller, to the current count of 390 stores from 813 in 2008. The company is also changing its sales mix, adding accessories for Apple (AAPL) products, for instance, and moving away from the music category. It also has the wherewithal to shrink its store base further, if necessary, as 80% of store leases expire in the next two years.

The company currently trades at 0.68x net current asset value (NCAV), and that's after the earnings release that sent shares up 18%. Trans World is also cash rich, ending the year with $88.5 million, or $2.81 per share in cash, and less than $5 million in debt. There's little doubt that this company will never again be a stellar, growing business, but it appears as though they are making the most of what was a bad situation.

This type of transformation is what you hope to see when buying down-and-out net/nets. Sometimes it takes a lot of time to unfold, as is certainly the case with TWMC.

But you have to love a comeback, whether it's in baseball or net/net land.

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