In 1932 at the bottom of the Great Crash, Ben Graham’s fund had dropped 70%, but it was precisely this time when he wrote an article on Forbes about the cheapness of the market and how the market was selling the United States for free. I feel we are close to the same situation.
Deep Value Companies
Stock Market Prognosticator previously shared a list of Net Current Asset Value plays, and I recently wrote about how there were literally hundreds of companies that are being quoted for less than their cash in the piggy bank. One such company that I have analyzed lately is ValueVision Media Inc (VVTV). These companies are being quoted in the market for much less than their liquidating value, as if they were all destined to be doomed. But does it make sense to be quoted for less than the cash in your hand?
A long time ago a president of the New York Stock Exchange testified, “In times like these, frightened people give the United States of ours away.”
Graham defined liquidating value very conservatively: "Working capital (current assets less current liabilities) then subtract any debt not included in current liabilities."
But we can be just as conservative while at the same time finding logic in a slight variant of the above formula.
The Net Net Working Capital
Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities
The formula states that;
- cash and short term investments are worth 100% of their value
- accounts receivables should be taken at 75% of their stated value because some might not be collectible
- take 50% off inventories, due to discounting if close-outs occur
The Table of Steals
Until recently, it was quite difficult to find a Net Net stock that had real prospects, but the market is washing them up ashore more and more frequently. The tide has finally gone out and here are a few that came up. Some are gems covered in mud while most are rocks covered in mud.
|Companies:||Price % to NNWC|
|Asta Funding (NASDAQ:ASFI)||16.18%|
|Nu Horizons Electronics (NUHC)||18.14%|
Standard Pacific (NYSE:SPF)
|Coast Distribution System (NYSEMKT:CRV)||29.96%|
|Beazer Homes (NYSE:BZH)||34.79%|
|Tandy Brands (OTCPK:TBAC)||35.14%|
|Trans World Entertainment (NASDAQ:TWMC)||35.92%|
|Emerson Radio (NYSEMKT:MSN)||36.64%|
|Tuesday Morning (NASDAQ:TUES)||41.20%|
|Network Engines (NASDAQ:NENG)||42.12%|
To run the screen yourself, go here. The top 7 are already trading at a huge 66% margin of safety.
However, these types of asset plays are not suited to everybody. There is a lot of volatility involved and there is a risk that the value may never be realized by the market.
As always, due diligence is required and ever more in these situations.
Disclosure: I own VVTV at the time of this writing