My Net-Net Shopping List

 | Nov 22, 2011 | 1:45 PM EST  | Comments
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Stock quotes in this article:

rimg

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form

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cutr

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scmr

It's a little busy around here with a houseful of family and friends expected on Thursday, and preparations for the big day have already begun. All the food has been purchased, but I still need to buy a river of wine to keep assorted personalities at bay. There is stock to be made, brine to be prepared -- and companies to evaluate and markets to watch. There's a lot of noise in the market lately, and much of it doesn't really matter to a long-term investor. At times like this, I try to ignore all the noise, focus on valuations and make sure the stock pans don't simmer dry.

So, I went searching for net-net stocks, or those close to being net-net, this morning. Over the years, both academic research and my real-world experience have shown that a portfolio selling for less than the value of net current assets is a winning strategy, regardless of market conditions and behavior. The strategy was developed by Ben Graham more than 75 years ago, and it still works today. The bonus to using this stock-picking approach is that it serves as a de facto market-timing device. When markets have sold off and stocks are unloved, there are lots of new net- net opportunities. As markets rise, there are far fewer opportunities in net- net stocks to put money to work.

My search turned up some interesting companies that are trading cheaply enough to be worth considering. One is Rimage Corp. (RIMG), a Minneapolis-based seller of digital publishing systems used to produce DVD, CD and Blu-Ray recordings used by a wide range of industries. The company recently purchased Qumu, an enterprise video communications company, to broaden its product line. After the purchase, Rimage still has $76 million in cash on hand. Add in roughly $20 million of receivables and inventory and you have a net current asset value of about $95 million.

The current market cap of the company is $115 million, so it's a near net-net stock worth further research. The bonus here is that the company recently raised its dividend by more than 70% and currently yields more than 6%. Management is also buying back stock below book value, an investment that should reward shareholders over time. Insiders must like the valuation and future prospects as the CEO and CFO of Rimage have both bought stock in recent months.

FormFactor (FORM), a maker of semiconductor test equipment, is trading below net cash levels. The company has cash and marketable securities of about $315 million and a total market cap of just $291 million. Fellow RealMoney contributor and net-net aficionado Jonathan Heller mentioned this stock in September, so I will resist the urge to go into more detail here. The company is losing money right now, so you have to watch the cash burn carefully if you buy this stock. The company did say in its recent earnings release that its turnaround plan is working and it intends to focus on reducing cash consumption. Year to date FORM has used its cash stockpile to buy back more than 1.1 million shares.

Most of the other net-net stocks I found are too small to write about here. There are a few stocks, such as Cutera (CUTR) and Sycamore Networks (SCMR), that are close to qualifying and they should be on your watch list. In spite of recent market volatility, we are not awash in net-net stocks, but there are a few opportunities to be thankful for.

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