It's great to be back writing for Real Money after a three-and-a-half-year absence. By way of re-introduction, I am an unapologetic deep-value investor. I search the scrap heaps and flea markets of the investment world looking for bargains and trying to separate the true junk from the diamonds in the rough, which is a very tall order these days. My criteria for value may sometimes go beyond that of traditional metrics, which can make things interesting at times.
Many of the value-related stock screens that I use reveal very little in this market environment. While I am not in the camp that believes markets are so tremendously overvalued that a crash is imminent, there are pockets of ridiculously rich valuations that I will no doubt explore in future columns. In a sense, though, it's an investment purgatory of sorts -- fairly to moderately overvalued markets with scarce pockets of value.
My all-time favorite screen is based on Ben Graham's net/net methodology. Net/Nets are companies whose market capitalizations are below the book value of their net current assets. To put that formulaic terms, net current assets equal a company's current assets less all liabilities (when applicable, I also subtract minority interests and preferred stock as well). Graham's terms, however, are a little more stringent than mine are; he looked for companies trading at less than two-thirds of their net current asset value, which is virtually non-existent these days.
Even by my standards, the U.S. net/net cupboards are quite bare. In, fact, I count just six net/nets with market caps greater than $100 million, and 15 with market caps greater than $50 million.
Most of these companies are not household names, and it's unlikely that most investors are familiar with any of them. Recently though, educational toy maker LeapFrog Enterprises (LF) has garnered some attention. On the surface, just based on some of the metrics, it's appealing. Currently trading at just 0.39x net current asset value, the company has $53.6 million in cash, so it's trading below net cash. There's no debt on the books, and it trades at well below tangible book value per share.
Sales have been terrible, however, and the company has been burning cash like crazy, including $36 million last quarter and $59 million over the past year. If I knew with any level of certainty that the bleeding had stopped and that cash drain would not continue, I'd be all over this one. But cash is a fleeting thing when you are trying to stage a comeback, as LeapFrog is. This company lives and dies by the Christmas retail season, and it is difficult being held captive by the whims of the average 10-year-old consumer.
Should the company have a solid holiday season and its new products fly off the shelves this quarter, the shares should soar from current levels. But that's a lot of "shoulds." The bottom line is that LF shares currently trades like an option on the 2015 holiday retail season, and shares will live or die by the choices parents make shopping at Wal-Mart (WMT), Target (TGT) or most anywhere in the coming weeks. Those choices will be, for the most part, will be driven by a "wish list" written by junior.
Maybe I'm just getting old, but I'll pass on LeapFrog. I have owned it in the past, but this leap is just too big this time around.