What an ugly start to the new year! I'm not just referring to the S&P 500's 5% year-to-date decline. The Russell 2000 and Russell Microcap indices are also down some 9% so far this year.
It's even worse for certain stocks that are "on the bubble" -- those that have disappointed investors in the recent past and are now getting discarded as if there's little or no hope for them.
For example, Arctic Cat (ACAT) -- a member of my Double Net Dividend Growers portfolio and a stock that I recently profiled -- has plunged some 24% over the past 7-1/2 sessions. ACAT now trades at around $12 a share, or just 0.86x tangible book value per share.
Is Arctic Cat cheap here? It sure looks that way to me, but it also seemed inexpensive at $16 a share -- and will be at $8 a share as well if that's where the market decides it should trade at.
That's the type of market we're in. You might think something is cheap now, but it might get even cheaper later. That's a big danger for value investors, especially those interested in smaller, more-distressed names. You've got to proceed with caution while the broader markets figure it all out.
As long as turmoil and volatility continue, the first thing that investors will abandon will be smaller, more-troubled names. That could create some great buying opportunities, but you might be better off "nibbling" to create a position rather than taking a big bite all at once.
Still, I think this is an exciting time, as we're start to see some intriguing situations develop. Value has been scarce for a few years now, and it's nice to be able to at least create a watch list of stocks that are moving into bargain territory.
For instance, it's been years since I've seen as big a name as Benchmark Electronics (BHE) trade below its net current asset value (NCAV). Of course, "big" is a relative term in this context, as Benchmark currently has just a $957 million market capitalization. But in net/net land, that might as well be a mega-cap.
BHE's qualification as a net/net might also be transient, but it's an interesting situation right now. The stock is down some 23% since April and 7% year to date. It currently trades at around 0.93x NCAV and 0.78x tangible book value per share.
Benchmark is also profitable (many net/nets aren't), trading at about 12.5x trailing earnings and 11.5x 2016 consensus estimates. And I've rarely if ever seen a net/net with a better balance sheet. The company last month added another $100 million to its current share-repurchase program.
Still, I can't get too excited about Benchmark's net/net status just yet, as the company recently completed a $230 million acquisition of Secure Technology. BHE financed the deal using a new credit facility, and we won't see a balance sheet that reflects that until Benchmark's upcoming 10-K filing comes out in late February or early March.
