Without a doubt, it's been a very strange and equally boring year for one of my favorite corners of deep value: Companies that are trading below net current asset value (NCAV), or net/nets. While some interesting names have qualified for what is a fairly stringent screening process, the sheer number of net/nets has been low. I attribute this to a couple of factors.
First, although markets have been volatile at times this year, especially during the second half of the year, there has not been enough of a shakeout in order to drive the "throwing the baby out with the bathwater" effect that tends to hit the lower quality names typically found in net/net land. At this point, it appears as though the markets may end the year about where they started, and flattish market conditions typically aren't a great environment for net/nets. Second, and this is anecdotal at best, there's been a proliferation of research in the net/net arena, which shines a greater light on the potential opportunities.
Since many of the candidates are smaller names with low volumes, the best ideas are getting a lot more exposure than they would have years ago, so they can easily be bid up with even a little investor interest. I started what I believed to be the first website devoted to the topic back in 2003, and the term "net/net" was way out of the mainstream, an all but forgotten Ben Graham technique that supposedly had little application in the modern investment world. It was something that deep-value types only whispered about. Today, the concept is no longer a lost, old-school investment technique, and there are now several "experts" in the blogosphere who are writing about net/nets.
Still, we end 2011 with a handful of decent-sized net/nets, but it's been a revolving door with some of these names the past couple of years, as they've been on and off the list several times. Ingram Micro (IM), with a $2.7 billion market cap, is among the largest net/nets you are likely to see. It's also part of a recurring theme we've seen this year in net/net land: profitable technology-related companies with large amounts of cash. In fact, Ingram has $1 billion in cash on its books. The company has a way to go before it becomes what I call a perennial net/net, or company that is destined to trade below NCAV, for whatever reason. Perennial net/nets offer little opportunity; they may appear to be cheap, but have nowhere to go.
Benchmark Electronics (BHE) is in the same boat as Ingram Micro, trading for 12x trailing earnings, with more than $250 million, or $4.39 per share in cash. It is unloved by the markets, and expectations appear to be very low.
Other net/nets with market caps greater than $100 million include Steel Excel (SXCL), FormFactor (FORM), Tuesday Morning (TUES), and Imation (IMN). Imation is a name that may be on its way to perennial net/net status. While the company has $233 million or more than $6.00 per share in cash, and actually trades at a negative enterprise value (EV) it has been in the red for seven consecutive quarters. A positive quarter or two, and the stock would catch fire, but it remains to be seen whether Imation's best days are already behind it.
Merry Christmas!
