Benjamin Graham, the father of value investing, especially liked the Net-Net investment strategy. The strategy is based on buying shares of companies traded at a significant discount from their net current asset value (NCAV), meaning a market value lower than the total current assets minus all liabilities. In fact, Graham even went a step further and calculated the value more conservatively - Net-Net Working Capital value (NNWC), which he defined by combining the cash and cash equivalents along with 75% of receivables and 50% of the inventory, and from that to subtract all of the company's liabilities. The assumption was that in extreme cases the company will be able to collect only some of the customers' bills and sell only a smaller fraction of its inventory in its current value, therefore, only some of the current assets were considered, and not all of them.
Such stocks are not only traded at a large discount of their net asset value, but all the fixed assets, intangibles and other long-term investments are actually there for free. In this case, even if the company fails and even closes, shareholders will earn nicely after selling the assets and distribute the earnings between them. Still, it is clear that not all of these companies will survive, therefore to increase the margin of safety Graham looked for companies with a market cap that is lower than 66% of their NCAV.
Graham believed, and rightly so, that it is wise to hold a relatively large number of such companies, since some of them did not seem to have an optimistic forecast for the near future. However, 90% of companies that Graham held in over 35 years of continuous investments have yielded positive returns, and on average, defeated the market return by a considerable margin. Additional research conducted over the years has also shown that holding such Net-Net shares is expected to beat the market over time.
Such Net-Net stocks are popping up like mushrooms after the rain right after sharp declines in the market, so there were many such shares in the beginning of 2009. Back then, it was even possible to buy Net-Net shares of relatively large companies. At times when the market is not priced relatively cheaply, like today, it is needed to turn a lot of stones in order to find them. Even then, these shares will generally be of smaller companies, anonymous, traded at a relatively thin volume. But, as mentioned earlier, purchasing them together or selecting the most attractive ones of them after a thorough analysis, can be worth gold to your portfolio.
Here are all the Net-Net shares currently trading on Wall Street, after I deleted all those traded at a market cap of less than 2.5 million, the Chinese companies (statistics show that there is a high risk of fraud in their financial data), and biotechnology companies that still have no revenue and the cash on hand will not support their activities for a sufficient period.
Asia Pacific Wire + Cable (NASDAQ:APWC)
Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS)
GigaMedia Limited (NASDAQ:GIGM)
Taitron Components Inc. (NASDAQ:TAIT)
Rubicon Technology, Inc. (NASDAQ:RBCN)
Catalyst Biosciences Inc (NASDAQ:CBIO)
OncoGenex Pharmaceuticals Inc (OGXI)
Vical Incorporated (NASDAQ:VICL)
Emerson Radio Corp (NYSEMKT:MSN)
STR Holdings, Inc. (NYSE:STRI)
JLM Couture, Inc. (OTCPK:JLMC)
Universal Power Group, Inc. (OTCPK:UPGI)
Tikcro Technologies, Ltd. (OTCQB:TIKRF)
MNC Media Investment Ltd (OTCPK:LTONY)
At a quick glance, the low valuation of some of them seems to be justified in light of the decrease in revenues and negative net profit in recent quarters. However, all of them are trading deep below the value of their liquid assets minus their liabilities. Some even have long-term assets and investments which are worth quite a bit of money, so in the equation of the chances vs. risks they seem to be interesting. Of course, if you decide to buy a single stock or two from the list, you'll have to analyze it in depth, just as you should analyze any other stock you buy.
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. 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.