Last week, I introduced the concept of "triple-nets"; companies that trade at between 2 and 3 times net current asset value (NCAV), but wanted to go into greater detail about how and why I got to this point. Ben Graham might be rolling over in his grave at the thought of this; his original net/net concept identified companies trading at less than 2/3 of NCAV. Since the calculation (which is current assets minus total liabilities) does not consider long-term assets (such as property, plant and equipment), the thought was that there was a potentially significant margin of safety in buying qualifying companies.
Graham's concept was a winner over the years, with several studies acknowledging success in owning net/nets. When I stumbled onto the concept 20 or so years ago, there were few companies that met Graham's stringent criteria. I altered the criteria, expanding the reach to identify companies trading at less than 1X NCAV. That was a fruitful area, but it has also dried up over the years, which tends to happen as markets rise, and also, I believe, as other investors have warmed to the concept, and driven up the prices of qualifying companies. In fact, there is currently just one net/net (my definition) with a market cap in excess of $100 million; that being VOXX International (VOXX) . That will likely change in a market correction.
Several years ago I again expanded the criteria to "double-nets" (companies trading at between 1 and 2X NCAV) as a way to determine what companies were on the precipice of becoming net/nets, if market conditions changed. Originally meant to be the "bench" for net/nets, this also became a fruitful area from which to identify cheap companies, and for several years, I've unveiled an annual "double-net" tracking portfolio each December for Real Money. There are currently about 25 or so double nets with market caps in excess of $100 million; an extremely low number historically. However, double-nets have been a very fruitful area for acquisitions over the past few years.
Hence, I've dumbed down the formula further in "triple-nets", which are effectively the "minor league" for double nets. They are simply a potential "double-net" pipeline. Who knows, perhaps I'll also unveil a "triple-net " tracking index. Value is difficult to find these days, so turning over more rocks, and expanding the opportunity set is necessary.
As reported in last week's column on the subject, there are currently more than 50 "triple-nets" with market caps in excess of $100 million. Beyond those revealed last week, there are a handful of other interesting names.
One of them is Fitbit (FIT) , a name that has truly given me "fits" as an investor. Currently trading at 2.86X NCAV, last January, I named it as my "favorite stock" for 2018. Down 5% since after a roller-coaster ride-like year in which it has traded as high as $7.50, and as low as $4.33, markets still are not really buying into the story. The balance sheet is solid with $2.54 per share in net cash (no debt), which should provide a nice runway as the company attempts to regain traction. Third quarter results presented a positive surprise, but the fourth quarter is where the rubber needs to meet the road. The consensus for Q4 has grown more positive over the past month, with earnings estimates increasing from 5.5 cents to 7 cents per share.
We'll know how this panned out when FIT reports earnings on February 25th, although I suspect we'll get some early glimpses with holiday sales intelligence.