I'm not sure how many of us were actually surprised that Standard & Poor's actually downgraded the U.S. credit rating. Frankly, it looked inevitable, and perhaps was a long time coming. Some may have believed that the U.S. would never lose its AAA status, Treasury Secretary Tim Geithner among them. I thought it would initially be a two-notch downgrade to AA, so AA+ was a "positive" surprise for me. I guess if the deed was going to get done, it would have to be on a Friday, after the market close as an attempt to limit any potential mayhem.
That gave us all a good 60 hours to stew and wonder what the fallout might be. Guaranteed, there was not a whole lot of relaxation this weekend. We all watched Asia last night, Europe this morning and gold breach $1700 an ounce. In the end though, whether the damage is limited today or not, the fact that we got to this point is downright sad. Hopefully, this is the wake-up call that won't be ignored.
I spent part of the weekend surveying the wreckage created by the recent "correction" and looking for opportunities. However, that certainly doesn't mean I'm going to put any cash to work today, but I want to be aware of what's cheap since it just might get cheaper today.
While the number of net/nets (companies trading below net current asset value, or NCAV) has been extremely thin for what seems like an eternity, this is the type of market where one can start to see that change. In recent weeks, there have been some decent-sized additions to net/net land. Despite reporting some nice revenue growth for the second quarter on July 28, shares of Ingram Micro (IM) fell about 11% last week, pushing the company back into net/net territory. This company has been on and off the list a few times this year, but it keeps putting up decent numbers. Ingram currently trades at 0.93x NCAV, .8x tangible book value per share and 9x trailing earnings.
Benchmark Electronics (BHE), which reported a second-quarter earnings miss on the same day Ingram reported, is back among the downtrodden, as shares have fallen 16% in the past two weeks. Benchmark now trades at 0.97x NCAV, 0.76x tangible book and just under 12x trailing earnings.
Finally, another, smaller name, Force Protection (FRPT), is flirting with net/net status. The company released its second-quarter results last week with earnings coming in well below estimates (-0.19 vs. -0.04). The good news is that the company maintains a relatively large cash position, nearly $150 million, or $2.17 per share, and no debt. Force currently trades at 1.05x NCAV and 0.83x tangible book. The company authorized an additional $10 million for its buyback program, a minor positive at this point.
There's a good possibility that these names, and others, will become even cheaper this week. So, we might just see some new additions to net/net land as well.
