The Dearth of Available, Investable Net/Nets

 | Mar 16, 2018 | 12:00 PM EDT
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Stock quotes in this article:

shos

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hd

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low

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rail

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rell

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cvu

I'm a bit nostalgic today as I ponder the dearth of available and investable net/nets (stocks trading below net current asset value). The rising tide of the markets has lifted nearly all boats (with some exceptions, including specialty retail), and I lament the fact that one of my favorite deep value hunting grounds is nearly devoid of possibilities. The difficult part is that I believe that the investment technique is still capable of revealing potential winners.

Last April, conditions were just slightly better in net/net land. At the time, I did not think the cupboards could be more barren, but I was wrong. At that time, there were indeed a handful of interesting possibilities, all of which I purchased sometime along the way, and still own to this day. There was yet another name that may have looked interesting on paper in some respects, but was a proverbial toxic value trap that I recommended avoiding.

That value trap, Sears Hometown and Outlet Stores (SHOS) , has since fallen 40%, as conditions have worsened, revenues have continued to decline, and the company has fallen deeper into the red. Still a net/net, and trading at just .3 X net current asset value (current assets less total liabilities), I don't see how the company survives in an ever-increasingly competitive environment where Home Depot (HD) and Lowe's (LOW) nearly own the appliance space.

Things were a bit brighter for FreightCar America (RAIL) (+15%), although this one has been a bit of a disappointment, putting up some worse than expected earnings numbers the past couple of quarters, and eliminating its dividend in the fall. Still, the balance sheet remains solid, and RAIL ended its latest quarter with $131 million, or $10.63 per share in cash and marketable securities, and no debt. The company is attempting to turn itself around operationally, and has a seemingly long runway to do so, given its financial position. RAIL currently trades at 1.33 X net current asset value.

Richardson Electronics (RELL) (+40%) finally put up a profitable quarter in January, and the stock breached the $8 level for the first time since 2015. Still a net/net, RELL now trades for .97 X net current asset value. And it has $58.6 million or $4.50 per share in cash and short-term investments. We'll learn in April whether the company can run its consecutive quarterly profit streak to two.

Finally, CPI Aerostructures (CVU) (+27%) also put up some better than expected quarterly results, and has been the beneficiary of some new contracts. Earnings estimates for 2018 put the forward price earnings ratio at 11, and the company now trades at 1.08 X net current asset value.

Ah, the good old days, when you could still find a few actionable net/nets.

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