Benjamin Graham, often considered the pioneer of value investing, is also associated with a statistical metric commonly known as "net-net." Graham would look for stocks whose market capitalization was lower than the net current asset value of the company. Graham would start with a company's total assets, net out all liabilities and then net out all non-current assets -- hence the term "net-net." Graham was after companies whose shares were trading below an overly conservative estimate of liquidation value. Basically, in buying a net-net, one would be getting a company for better than free.
Despite today's record-setting market and asset prices, which are starting to get inflated, I've found a net-net in a company with more than $100 million in market cap. Trans World Entertainment (TWMC) is a specialty retailer of music, electronics, video games and other electronic accessories. The company operates more than 330 stores, the majority of which are mall-based locations.
Trans World currently has a market cap of $122 million. As of May 3, total assets were $264 million. Of that figure, $240 million comprised current assets, of which $90 million was in cash. Total liabilities were $90 million, so the net current asset value was $150 million. By the exact definition, as of May 3 Trans World is a statistically cheap stock and a net-net.
Does that mean the company is a fantastic investment? Not necessarily. Of the $240 million in current assets, $140 million is likely inventory that consists of such things as video games, DVDs and CDs. That kind of inventory has a short shelf life before it starts to lose value. That said, the company has improved its margins. In fiscal 2011, sales of $540 million generated $2 million in net income, while in fiscal 2013 sales of $393 million generated $8.3 million in income. That said, such a precipitous sales drop does not make for an inspiring trend.
On the other hand, for those who like to make these types of bets, as long as the company remains statistically cheap it could one day lead to a nice payoff for shareholders. The company could pay a huge cash dividend or start shuttering stores and returning proceeds to shareholders.
Not all net-nets would pay off, and Graham knew that. He took the approach of buying a basket of them, allowing the winners to more than make up for the duds. As for Trans World, shares have been trending lower -- it closed at $3.84 Tuesday, off from a 52-week high of $5.59. Just as with any other type of investment, a margin of safety is paramount. While Trans World is a true net-net today, a further decline in the share price would make the opportunity all the more alluring. But the company is certainly one to keep on the radar screen.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider TWMC to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices
