All it takes is a little downside market volatility to shake out some potential value. With the S&P 500 down 3.8% last week, the Russell Microcap Index, which is probably the best benchmark for companies within some of the deep value stock screens I utilize, was hit much harder, down 5.4%. That's par for the course, as the smaller names typically suffer more damage when markets are heading south.
As a result of last week's drubbing, the list of companies trading below their net current asset value (net/nets) grew ever so slightly. This is a list on which no company would want to be, because it typically signifies a level of distress. But it may provide potential opportunities for deep value investors with especially strong stomachs.
Specialty boating retailer West Marine (WMAR) is once again a net/net; it's been on and off a few times over the year. The company operates 270 stores in 38 states, and sells a variety of boating supplies, footwear, and clothing. Last year, more than 81% of sales were from core boating products such as maintenance, electronics, sailboat hardware, engine systems, and anchors.
The company is attempting to grow sales from the e-commerce side of the business, which last year accounted for 7.7% of sales. West Marine instituted a 15% target for sales from the web. Not surprisingly, given the seasonality of the boating business, the company generates the bulk of revenue during the first and second quarters; last year those periods accounted for 64% of revenue.
Currently trading at 0.92x net current asset value, and just under two-thirds of tangible book value per share, West Marine put up some better-than-expected numbers for the third quarter, beating consensus estimates by 11%. However, the optimism has faded since that late October earnings release, and shares have taken a 19% hit since. Interestingly, but not uncommon in the cases of smaller, underfollowed names, the pullback has occurred with no news.
Often times, net/nets are not currently profitable, but that's not the case with West Marine. Currently trading at 39x trailing earnings, "consensus" estimates (which in fact include just two analysts) are calling for 2016 earnings of $0.36, putting the forward PE at 23. As is typical for a retailer, current assets are largely comprised of inventory, but there is also $50.5 million, or $2.45 per share, in cash. Not bad for a stock that closed last Friday at $8.33. Sweetening the story is the fact that the company has no debt.
Retailers don't always make the best net/nets; with the strategy so focused on the value of current assets, they are typically top heavy in inventory whose true value is questionable. West Marine joins two other current net/net retailers that are struggling: Sears Hometown and Outlet Stores (SHOS), and perennial net/net Trans World Entertainment (TWMC).
If smaller names continue to be punished, we may see some additional net/net retailers in the near future.
