For the thirteenth straight year (since the Eagles last appearance), I did not have a horse in the race at yesterday's Super Bowl. Be that as it may, it was the best one I've ever seen; an amazing comeback that will go down in the books. There seems to be no middle ground in terms of attitude toward the Patriots; you either love them or hate them, but what they were able to pull off after such sloppy play in the first half, made for a great game.
Unfortunately, that level of excitement did not carry over to my late-weekend ritual search for companies trading below their net current asset value (NCAV). Not that I believed it would, especially in this market environment, but each week I hold out hope that some small company, or a handful of them, are unfairly punished the point that they end up in net/net land, with their market caps below their NCAV. That would not necessarily make them candidates for purchase, but at least there would be some subjects for further research and scrutiny.
I've never seen the cupboards of net/nets so bare -- and that's a phrase I've repeated multiple times over the past few years. Of the forty or so names that meet the initial screening criteria, about half are unprofitable biotechnology names that are burning through cash, and don't deserve a second look. They may appear to be net/nets because they meet the formula criteria, but their current assets are transient.
The other recognizable name is Sears Hometown and Outlet Stores (SHOS) . On paper, this one may look interesting at first glance. Trading at just 0.33x NCAV, and 0.27x tangible book value per share is enough to get a deep value investor's juices flowing. But that's why it's important to go well beyond a first glance with distressed names such as SHOS. The company has not turned an annual profit since 2014, and revenue continues to slide.
Last quarter, revenue dropped 10.8% versus the same quarter last year, and same-store sales fell 6%. Home appliance same-store sales fell 11.5%, in what has become an extremely competitive environment, with the likes of Lowe's (LOW) and Home Depot (HD) in the home appliance business.
One of the knocks on retailers as net/nets is that the quality of their net current assets is typically lacking. With just $15.6 million in cash, the bulk of SHOS current assets ($425 million) is inventory. Cash is a high-quality current asset, because what you see is what you get -- there's no discounting necessary. Not so with inventory, which, in a fire sale, might command much less than it's carrying value. While SHOS has no long-term debt, it does have $92 million in short-term debt.
This is a situation that I might have been interested in early in my years of net/net research, but experience has shown me that there's too much risk here. Granted, at the current price, SHOS is trading more like an option on the company's survival, so any good news would likely give the stock a nice bump. Markets interpreted a Dec. 1 13D filing -- which indicating Eddie Lampert's 57% ownership stake in SHOS and that he met with SHOS representatives to discuss Sears Holdings' (SHLD) review of alternatives for the companies' Kenmore, Craftsman, and DieHard brands -- as a positive, and shares rose 10% in response. However, it's been downhill since then, with shares falling 43%. (As a side note, on Jan. 5, Sears Holdings announced the sale of Craftsman to Stanley Black & Decker (SWK) for $900 million)
While I don't plan on participating in this one, it will be interesting to watch.
Interestingly, far down on the list of net/nets in terms of market cap, but too small to mention, is the company that provides much of the candied fruit that is a main ingredient in fruitcakes. You can't make this stuff up.