While investors somewhat nervously await today's action following the November U.S. jobs report and yesterday's mini-drubbing, I've still got my eye on the ever-smaller underbelly of the value world -- companies that appear cheap relative to net current assets.
There are now just two-dozen names with market caps above $250 million that qualify as so-called "double nets," but that universe will likely grow if downside market volatility persists. (While I'm not hoping for that, it sure would be nice to have a larger pond of value stocks to fish in.)
In all, the 24 stocks that meet my qualifications (down from 25 when I wrote last week's column) have dropped by about 15% on average so far this year. That's not surprising, given that some companies are on the scrap heap for good reasons. The art is to identify those ones that don't belong there.
Names such as Ingram Micro (IM) and Tech Data (TECD) are perennially on the list, at least until markets take a tumble and they potentially wind up on my dreaded "net/net" list (trading below net current asset value).
Both companies are profitable, but in very low-margin businesses. They're not "double nets" because they're distressed -- they just inherently trade at relatively low multiples to net current assets, book value and free cash flow.
In other words, they belong on my double-net list but aren't bad investments. In fact, both have shown some successes over the past several years and have rewarded investors year to date.
But let's focus today on watchmaker Movado (MOV), which is back in double-net land after a two-year absence. Movado nearly quintupled in value between early 2010 and late 2013, but is down more than 40% over the past two years following some earnings missteps along the way.
That makes the stock look interesting here. The balance sheet looks solid -- the company ended last quarter with $188 million in cash ($8.11 per share) and just $40 million in debt (long term). But MOV currently trades at just 1.79x net current assets (current assets less total liabilities) and 1.4 times tangible book value.
Still, the stock yields 1.6%, and the dividend has been growing at a solid clip since management reinstated it in 2011. Movado has also been buying back stock, reducing share count by 2.1 million shares (8%) as of Jan. 31, the end of its last fiscal year.
I've long been a fan of the combination of rising dividends and stock buybacks, and as of Oct. 31, MOV still had $17.2 million remaining in its share-repurchase authorization. Another bonus, the company trades at a modest 12x or so of 2017 consensus estimates.
However, Movado's business faces quite a bit of economic sensitivity. Earnings can swing wildly, and one of the concerns I have is that I don't know if demand for watches is growing these days. Many people -- myself included -- have replaced their watches with their smart phones' built-in clocks.
