The merits of Benjamin Graham's net-current-asset approach to investing have been pointed out many times. The merits of owning companies that sell in the marketplace for less than current assets minus all liabilities are well demonstrated. And yet very few people use this successful cigar-butt approach to investing in stocks. Net-current-asset stocks tend to be small, unloved companies that haven't fared well in the recent past.
The net-current-asset approach can lag the market for long periods of time. The returns are beyond lumpy. In the 1990s, as stocks rose consistently, the strategy underperformed in seven of the 10 years. It is hard to stick with an approach underperforming that badly, but during the next three years, the strategy more than tripled investors' money as the rest of the market collapsed.
The best way to use these stocks is as part of a broader deep-value portfolio. It is difficult most years to find enough stocks to be fully invested unless you want to run a highly concentrated portfolio of cigar butts. I like to own lots of safe and cheap stocks, and I generally avoid high levels of concentration, and so I consider net-current-asset-value stocks to be one more tool in the shed.
This morning, I ran a screen looking for net- net stocks that might be worth consideration. As you might expect, there are not many now, and most of what I found is very small. The majority of stocks trading at a discount to net current asset value, or NCAV, were tiny, but I did find one larger net-current-asset bargain worth buying and several interesting companies that are worth considering as bargain issues.
When I first talked about LeapFrog (LF) earlier this year, I said that either the company would get its act together this past holiday season and the stock would soar, or the company would continue to underperform and mismanage inventories and it would collapse. The latter scenario played out, and the stock has tumbled. The stock is now a cigar-butt bargain issue that trades at just 76% net current asset. I don't know what will happen to LeapFrog. I just hope management will wake up and realize the company knows how to make great educational toys, but not so much about running a business, and will sell out to a larger toy or educational products company. Management could probably liquidate the company at a profit at current prices, and so it is worth adding to any current position or establishing one if you have not done so.
Emcore (EMKR) is an interesting company that trades for just a little bit more than net current asset values at the current price. It makes semiconductors and systems for the fiber-optics and broadband markets. The company is seeing decent sales and earnings growth this year, and is being pretty much ignored by investors. The stock popped higher last year after the company sold its space photovoltaics business for $150 million. Small-cap activist manager Becker Drapkin has a 10% stake, and several other noted value and small-cap growth specialists also own shares. The future looks pretty solid for Emcore, and the stock should trade higher compared with asset value than it does now. It is not a pure net-net stock, but it is an intriguing issue.
Richardson Electronics (RELL) is on the list again as it trades at just 87% of net current asset value. I strongly suspect that this will be one of those stocks that is a long-term frustration, leading many to sell just before it triples in value. The company makes electronic components and display systems, and business has been just average for a few years now. Richardson has been investing in a new information-technology platform and has been building out Richardson Healthcare for the past years, which has been a drag on profits and cash flow. The stocks yields 2.76%, and management has been buying back stock, trying to reward patient shareholders.
There are not a lot of net-current-asset a bargains available, but a few that trade for less -- or in the case of Emcore, just a little more -- than NVAC, are worth further investigation by patient aggressive investors.
