Besides keeping some dry powder on hand for the times that markets present opportunities, I am also a believer in evaluating your bench. By that, I mean knowing which companies are the up-and-comers that are within your preferred investment techniques, especially if you screen for candidates. These are the companies that may not meet your investment criteria just yet but might if there was a pullback.
I first started screening for double nets -- companies trading between 1 and 2 times net current asset value, or NCAV -- several years ago when the availability of net/nets, or companies trading at less than 1x NCAV, was drying up. Double nets ended up being a fairly compelling area of the market, with many being acquired over the last few years.
Now, with a multiyear market run-up, double nets are becoming scarce. So, I now am screening for triple nets -- companies trading between 2 and 3 times NCAV. These are the companies that are likely to end up in double-net land at some point, especially if they pull back.
Screening criteria for triple nets is the following:
- Market capitalization in excess of $100 million
- No financials or development-stage companies
- Trading at between 2 and 3 times NCAV (NCAV is calculated by subtracting a company's total liabilities from current assets)
Fifty-three names made the cut, so there is a decent-size universe at this point. Some of the qualifiers are, not surprisingly, former double nets that are now triple nets through a combination of an increasing stock price, changing balance sheet metrics, or a combination of the two. These include AVX Corp. (AVX) , Universal Corp. (UVV) , PC Connection Inc. (CNXN) and Movado Group Inc. (MOV) . There several specialty retailers, including Cato Corp. (CATO) , Vera Bradley Inc. (VRA) , Shoe Carnival Inc. (SCVL) and Citi Trends Inc. (CTRN) .
The biggest name on the list, with a market cap of $4.5 billion, is First Solar Inc. (FSLR) . The stock, which is down nearly 37% year to date, currently trades at 2.3x NCAV. The company is awash in liquidity, with more than $2.7 billion, or $26 a share, in cash and short-term investments. While the market was not thrilled by the company's third-quarter earnings report, declining revenue and full-year 2018 guidance, shares currently trade at about 14.5x next year's consensus estimates.
One of the other interesting names was Crimson Wine Group Ltd. (CWGL) , a spinoff from Leucadia National, now Jefferies Financial Group Inc. (JEF) . Crimson Wine Group has several brands, including Pine Ridge, and has done little since the spinoff; shares are down more than 24% year to date and are trading near an all-time low. Revenue has been flat over the years and the stock has generated little interest. Indeed, it garners no analyst coverage, so forget about earnings estimates.
Crimson Wine Group currently trades at about 2.66x NCAV. It's a name I've peripherally been watching the last few years, having had success in publicly traded wine names in the past. It's time to do a deeper dive.
More triple nets to come in the near future.