A Flyby Over Value's Backwater

 | Oct 26, 2016 | 3:00 PM EDT
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The ever-declining population of net/nets (companies trading below net current asset value) continues to display revolving-door tendencies. Names that qualified for net/net status years ago will reappear from time to time; sometimes these are what I term perennial net/nets, which describes companies that for one reason or another tend to trade at a low multiple of net current assets by nature and may not necessarily be worthy of purchase. Some might call them value traps. The difficult part is separating the perennials from those worthy of purchase.

Steel Excel (SXCL) is the latest example of a repeat net/net offender. Formerly ADPT Corp., and before that Adaptec, the company morphed from a storage business to a shell company to one that now has interests in oil and gas exploration and sports through its Steel Coaching System. The company is controlled by Steel Partners, which owns 58% of the shares (hence the name).

From an operating perspective, there's not much to get excited about, although last quarter the company was fairly close to breakeven. It's the balance sheet that's most interesting. SXCL ended its latest quarter with $165.9 million, or $16 per share, in cash and short-term investments. Excluding debt of $42.7 million, the company has nearly $12 per share in cash and currently trades at about $11.45. It also trades at just over 50% of tangible book value per share.

In addition, there were $139 million in operating loss carryforwards that expire between 2022 and 2035. Given the stock's light volume as well as control by Steel Partners -- the company's chairman is Steel Partners' Warren Lichtenstein, who is also executive chairman of former net/net ModusLink (MLNK) -- this one is not for everyone.

Elsewhere in net/net land, not much else has changed. Sears Hometown and Outlet Stores (SHOS) , which I still would not touch, continues its decline. The only other investable qualifiers with market caps in excess of $100 million include perennial names Trans World Entertainment (TWMC) , Richardson Electronics (RELL) and West Marine (WMAR) .

Richardson has cooled off recently after a challenging quarter, but still has $5 per share in cash, yields 3.9%, and trades at just 0.63x tangible book value per share. My latest net/net acquisition, West Marine, announced fourth-quarter results yesterday, but I have not yet had time to dig into them. It does appear that they narrowly beat consensus revenue estimates but missed on earnings (15 cents a share versus a 17-cent consensus). It could be an interesting day for the stock.

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