Net-Net stocks were highly recommended by Benjamin Graham and the staple of Warren Buffet's early investing style. There have been numerous studies that show that diversified investors in a range of net-nets greatly outperform the market. Taking the Current Assets only and taking it away from the total liabilities you get the NCAV. If the share price is trading below the NCAV, if the company was to liquidate completely and stop trading, you would make an immediate profit on your position.
It is for this reason that net-net stocks tend to be on loss making companies. The fact that these companies highlighted below are small caps indicate that hedge funds cannot trade them (because there is not enough profit and liquidity in it for them.) This makes the stock less efficient and gives the patient retail investor a chance to profit.
Richardson Electronics Ltd (NASDAQ:RELL)
Richardson Electronics provides customized display solutions, healthcare equipment and electron devices in North America, the Asia Pacific, Europe and Latin America.
RELL has a Net Current Asset Value (NCAV) of $8.85 and is trading at $5.20 at the time of writing. The company has no debt and a healthy Current Ratio of 6.2. This is a low Price/Sales stock 0.48 and Price/Book stock 0.46. It is trading below the amount it has in cash also.
The reason it is trading below cash is that the company lost money in 2014 and 2015 making this a loss making net-net.
TSR Inc (NASDAQ:TSRI)
TSR provides contract computer programming services in New York, New England and the Mid-Atlantic region. The focus of the company is vendor management companies and financial services customers. This stock is really small with a market cap of 7.26 million.
The NCAV is $4.73, while the stock is $3.7. What makes this stock even more attractive is that unlike RELL it is actually profitable - albeit small with $0.3 mill in income. The company lost money in 2012 - 2014 but was profitable in the other years from 2001 - 2015.
The risks from this company are that 34% of its revenue is from financial services which is a problem in an economic downturn. There is a high concentration of customers to revenue, with 10 customers accounting for 80% of revenue. One of these customers is Citigroup. The CEO and Vice President also received compensation that was double the company's net income in 2015.
The EV/EBIT is a very low 1.58. Like RELL, there are some attractive fundamentals, P/S of 0.12, P/B of 0.78 and P/C of 1.16.
I hope you will agree that I have provided you with two solid net-net stocks for you to do more research on. Net-nets are such a profitable strategy but so hard to find. I have done a lot of the work for you!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.