Cheap Stocks 26 Net/Net Index Update

Three months since launch, the Cheap Stocks 26 Net/Net Index is plain and simple getting the stuffing knocked out of it.  We are not all that surprised at this point.  The Russell Microcap Index is up 7.3% since the inception of CS26, while the Index itself is up about 2.1%.  We expect a roller coster ride with this index over the next couple of years, and believe that a 2 year timeframe is the minimum time period for proper evaluation of indexing net/nets. 

So far, much has happened to the constituents of CS26.  BigBand Networks was acquired, which resulted in a 65% gain.  Rather than replace BigBand, the proceeds now sit in cash. 

In November, Trimeris (TRMS) merged with Synageva BioPharma Corp (GEVA), and that company replaces Trimeris in the Index.

The winners to date include ModusLink (MLNK, +35.8%), Synageva (Trimeris-GEVA, +116%), and RCM Technologies (RCMT, +21%).  The losers include Advanced Battery Technologies (ABAT, -73%), Opnext (OPXT, -37%) and Volt Information (VOLT, -24%)

Stay Tuned.

*The author has no position in the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

JG Boswell Fundamentals Update- 2011

Thanks to the addition of the most recently available year-end data, we've now strung together nine years worth of fundamentals for JG Boswell. Due to the complexity, and growing size of our spreadsheet, we've decided to share just some of the data that will put BWEL's current valuation in perspective.


JG Boswell (BWEL)
9 Year Averages Based on Annual Data:
P/E: 26
Price/Sales: 1.58
Price/Book Value: 1.41
Net Profit Margin: 7.87%
EV/EBITDA: 9.51
Dividend Yield: 2.29%
Market Cap: $616 million
Enterprise Value: $718 million

Current Data (2011 Annual)
Price: $714 (10/26 close)
EPS (Fully Diluted): $48.05
P/E: 14.9
Price/Sales: 1.62
Price/Book Value: 1.32
Net Margin: 10.9%
EV/EBITDA: 7.47
Indicated Dividend Yield: 2.24%
Current Market Cap: $713.1 million
Current Enterprise Value: $918.9million
Cash: $1.31 million

*The author has a position in JG Boswell(BWEL). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Cheap Stocks 26 Net/Net Index Update: Bigband Networks to be Acquired

We've already had one name change, and a reverse split (Steel Excel, formerly ADPT) among the members of the CS 26 Net/Net Index, and now another name is being taken out.  Big Band Networks (BBND) is to be acquired by Arris for $2.24 per share.  Big Band is now the leading performer since inception for CS26, up 67%.  If and when the deal is completed, for the purposes of the index, proceeds from the sale will be put in cash.

Its only been one month since we launched CS 26, and given past experience, there will likely be more acquisitions, perhaps a bankruptcy, and other surprises during the two year period we'll be traking this index.

So it goes in Net/Net land.

*The author has no position in the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Cheap Stocks 26 Net/Net Index Update and Crates

There's been one change in the Cheap Stocks 26 Net/Net Index since we rolled it out on September 13th.  Adaptec has undergone a 1 for 10 reverse split, and changed it's name to Steel Excel Inc (ADPTD).  There will no doubt be more changes on the way; at least that was our experience with the CS21 Net/Net Index.

Four weeks in, CS26 is down 2.59%, while the Russell Microcap Index, the benchmark we are using, is up 1.89%.  The biggest gainer so far is Trimeris (TRMS), which is up 41%, while the biggest loser, Opnext (OPXT) is down 23.4%.  Stay tuned.

Crates??

You may have noticed the reference to "Crates" in today's title, as well as the ad for Overhead Crates that was added to the site this morning.  This is a complete departure for us, but we wanted to recognize this amazingly simple innovation.  This is an unpaid, unsolicted ad, and we have no financial ties to the company that has created this product.  Nonetheless, we felt compelled to bring the company, and it's product to our subscribers attention.

Overhead Crates has designed a simple product that takes advantage of space available in many basements, that most people don't realize could be utilized as storage space.  We've installed the product ourselves, and found it to be brilliant!  A very simple installation!  Check out the site for yourself.

*The author has no position in the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Interview on Moneyshow.com

Kate Stalter of Moneyshow.com recently interviewed me for a piece that was released today regarding net/nets.

Portfolio Metrics for The Cheap Stocks 26 Net/Net Index

Thanks for all of the e-mails that we've received regarding the new index. Some have questioned the inclusion of certain companies in the Index, based on one issue or another. The truth is, net/nets often have fleas. Perhaps there are corporate governance issues, the operating business is broken, or there is simply great skepticism as to whether a company is a going concern. Sometimes the companies are simply too small to generate any interest, and a decent name may have fallen through the cracks. Make no mistake, we fully expect that there will be bankruptcies by the time the our two year time frame has passed. There will probably be companies that will be acquired; and a few whose stock price will skyrocket relative to their current price. We experienced all of the above with the CS 21 Net/Net Index; this is simply another experiment in Net/Net Indexing.

Cheap Stocks 26 Net/Net Index Portfolio Metrics at inception (9/13/2011)

Total Market Cap:$6.297 billion

Average Market Cap:$242 million

Total Cash and ST Investments:$3.944 billion

Price to Book Ratio:.63

Price to Net Current Assets Value (NCAV):.84

*The author has a position in Ingram Micro(IM). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only

Introducing The New Cheap Stocks 26 Net/Net Index

Back in February of 2008, we launched the Cheap Stocks 21 Net/Net Index, an experiment in net/net indexing. This was not a particularly good time for net/nets; the quality of those available was quite low. What better time, we thought, to truly stress test the concept. The results after two years, while not as compelling as we'd hoped, were still quite good. The CS 21 Net/Net Index, a rag-tag bunch of troubled companies outperformed the S&P 500 by 2537 basis points, and the more appropriate benchmark The Russell Microcap Index by 1537 basis points, returning 5.1% during the two year period.

In the past year or so, the ranks of net/nets have been extremely thin. Our readers have wondered where we've been, with so few postings in recent months, but the truth is, there simply has not been much to write about in net/net land. The recent market pullback, however, has helped to push a few more companies below net current asset value. While the number of net/nets is still a bit thin, we've decided to introduce a new net/net index.

Unlike our previous CS 21 Net/Net Index which was cap weighted, the New Cheap Stocks 26 Net/Net Index will be equal weighted. It is comprised of 26 companies with market caps in excess of $40 million that were trading below their net current asset value as of today's market close. There will be no rebalancing, no companies will be added or deleted, and we'll track the results over the next two years. We are keeping this very simple.

Here are the constituents of the CS 26 Net/Net Index:

Ingram Micro (IM)
ADPT Corp (ADPT)
Benchmark Electronics(BHE)
Imation Corp.(IMN)
RealNetworks, Inc.(RNWKD)
ModusLink Global Solutions(MLNK)
Tuesday Morning Corporation (TUES)
Maxygen, Inc.(MAXY)
Volt Information Sciences, Inc (VISI)
Axcelis Technologies, Inc. (ACLS)
Kimball International (KBALB)
Opnext, Inc. (OPXT)
Advanced Battery Technologies,(ABAT)
BigBand Networks, Inc. (BBND)
Myrexis, Inc.(MYRX)
Gencor Industries, Inc. (GENC)
Parlux Fragrances, Inc. (PARL)
Trans World Entertainment Corp (TWMC)
Heelys, Inc. (HLYS)
RCM Technologies, Inc. (RCMT)
Trimeris, Inc. (TRMS)
GTSI Corp. (GTSI)
Emerson Radio Corp (MSN)
Adams Golf, Inc. (ADGF)
Planar Systems, Inc. (PLNR)
Books-A-Million, Inc.(BAMM)

In true net/net fashion this is not a well diversified group of companies, and is very heavy on technology.

The beginning value for the Index will be 260.00, and we'll update the progress weekly.

Stay tuned for more on the index members, portfolio fundamental data, and more.

*The author has a position in Ingram Micro(IM). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Confirming JG Boswell's Dividend

In the years that we've held shares in Bosewll, the dividends have risen from $2.75 per quarter in 2003, to $3.50/qtr beginning in 2005/2006. For the past five years, the dividend had not changed. However, we can now confirm that the latest dividend, which was paid on 6/10, was $4.00 per share.

*The author has a position in JG Boswell(BWEL). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

JG Boswell Revisited: Beware of the Message Boards

I've owned and covered mysterious under-the-radar cotton farming giant JG Boswell for several years now. Time was that no one knew about, or discussed this highly illiquid pink sheet company. There was good reason for that, too. Although publicly traded, Boswell behaves more like a private company, and keeps information close to the vest. You'll never see an earnings release, company guidance or any other communications associated with many public companies. The fact is that Boswell is not required to file with the SEC because it has fewer than 300 registered shareholders. Even annual financial data is somewhat difficult to find.

Owning such companies is risky. This is a risk that I'm willing to take, because I believe that the company is worth significantly more than it's current $780 million market cap. But I am taking a lot on faith; not the least of which is the belief that the company will ultimately convert valuable assets, such as water rights, into cash. But there are no guarantees this will happen.

Lately, the message boards have been hopping with activity related to BWEL. For years, there was nothing. Now, there are some fairly wild claims being made about the company and it's ultimate value; claims about the value of the land, the water rights, and other assets that I'm not certain the company even posesses.

Don't get me wrong, I am long this company and believe there is value there. But the true value of the land, and even the size and scope of the water rights is unknown. I've seen claims of $100 earnings this year due to higher cotton prices (BWEL earned $31 per share last year), that the dividend will be raised, that a special dividend will be paid, that shares are worth $10,000 or more. Don't get me wrong, there are few that would be happier if BWEL was truly worth $10,000 per share, but I'm certain that much of this is being perpetuated by one or more individuals, and I'm not sure where they are getting their "facts".

The bottom line is to be careful what you read, and what you believe.

*The author has a position in JG Boswell(BWEL). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Net/Nets Becoming Rarer than a Blue Moon

Just when you think that the ranks of net/nets can't get any smaller, they do just that. This site was originally dedicated to the identification and research of companies trading below net current asset value, and at the time of launch in 2003, was the only site, at least that we were aware of, that covered net/nets.

Since then, interest has grown, and there are several websites that now cover net/nets. All of this coverage has brought the concept more into the mainstream. Ten years ago, net/net was a foreign term, even to some value investors. That's not so much the case any longer.

We believe that all of the additional coverage along with rising markets, have acted in tandem to reduce the universe of net/nets.

At ths writing, we can only identify 2 net/nets with market caps above $100 million, ADPT Corp (ADPT) and perennial net/net Audiovoxx (VOXX).

It's not much better between $50 million and $100 million. There, we find Myrexis (MYRX), Gencor Industries (GENC), Parlux Fragrances (PARL), Heely's (HLYS), Integrated Electrical Services (IESC), Trans World Entertainment (TWMC), and Planar Systems (PLNR).

We are starting to sound like a broken record, but that's the fewest number of net/nets we ever seen above $50 million in market cap. This will change. When? We don't know.

*The author has no position in the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Flashback: Investment Lessons Learned From a Bully

This is a little light on ideas, but happens to be our favorite column in the history of this site. This originally ran on January 26, 2008.


Charlie was the consumate bully. One of the older kids in the neighborhood, and also the paperboy, he had a bad reputation and it was well earned. The event that occurred on one snowy day in our small quiet town in central NJ some 30 years ago can today be used as a metaphor for an important investment lesson.

We'd spent much of the day building a huge snow fort--my brother and I, Jimmy and Jon, brothers who lived across from us, and a few other assorted neighborhood kids. We could all fit inside this circular structure, but the walls were so high that we could not see out, save for a "window" or two built into the wall. Definitely the best snow fort we'd ever built.

But we soon realized that our snow structure's hours of existence were limited. Not because of the sun, but because of something much more menacing: Charlie. We realized that he was due to make his afternoon newspaper deliveries, and as soon as he saw our fort, he would very likely destroy it. At 15 or 16, Charlie was a big kid, and could severely damage our fort with one flying leap.

We thought quickly. If Charlie was going to take down our fort, he was going to do so at his own peril. We quickly loaded that snow fort with everything we could find--rakes, shovels, other garden implements standing upright, even a full size garden tractor. He might take down the fort that we spent all day building, but that bully was not going to walk away unscathed.

We hid in the bushes, and along came Charlie. He saw our snow fort, but could not see what was contained within. He stopped, he sprinted, he jumped, and landed, destroying our fort. How proud he must have been as he hit that wall of snow--until a split second later when he landed on a tractor, several garden implements, and half the contents of Jimmy and Jon's garage. Charlie got a big, painful surprise that snowy afternoon. What appeared to be a harmless, ultra white snow fort, was actually much more. It's contents could not be seen from the outside; hidden within it's walls were dangerous, unseen risks.

That day, Charlie the bully cried like a baby. I don't remember seeing him all that much after that. He didn't suffer any permanent damage, and in hindsight, I'm glad he was not injured. We all (I hope) learned important lessons that day.

Hopefully the investment lesson is clear. During those times of financial crisis, when companies are beaten down, we as investors have the propensity to be fooled by the "It's down 50%, it can't go any lower" sentiment. That's the time to be aware of what might really be contained within a given company's situation. Is their peril lurking behind snowy white walls? Is it really worth the risk?

Charlie, if you are out there, I'd bet you wouldn't go near the Radians (RDN), MBIA's (MBI), or other such companies that have been trounced, yet may still conceal the unexpected. There may ultimately be reward, but how much risk are you willing to take?

*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Discount to Value Investing Congress West

Our friends at the Value Investing Congress are once again extending Cheap Stocks readers a discount to attend May's conference (May 3rd and 4th) in Pasadena. The current offer will expire on February 17th. To learn more, please click on the ad to the left of this post. Hope to see you in Pasadena!

Where are All the Net/Nets Part II

We've received several subscriber inquiries regarding the othernet/nets, those with market caps above $50 million, that we referenced last week. The pickings are slim, but here the are:

Myrexix Inc
Ticker: MYRX
Price: $4.21
Market Cap:$106
NCAV: $121.5
Mkt Cap/NCAV: .87
Cash & ST Invest: $124.8
P/E:NA

HQ Sustainable Maritime Ind
Ticker: HQS
Price: $4.75
Market Cap:$85
NCAV: $111
Mkt Cap/NCAV: .77
Cash & ST Invest: $64.5
P/E:7

Insmed Inc
Ticker: INSM
Price: $.65
Market Cap:$84.5
NCAV: $123
Mkt Cap/NCAV: .69
Cash & ST Invest: $124.3
P/E:50

Parlux Fragrances
Ticker: PARL
Price: $3.44
Market Cap:$70.5
NCAV: $91
Mkt Cap/NCAV: .78
Cash & ST Invest: $14.2
P/E:NA

Gencor Industries
Ticker: GENC
Price: $7.36
Market Cap:$70
NCAV: $76.3
Mkt Cap/NCAV: .78
Cash & ST Invest: $256.8
P/E:24

Trans World Entertainment
Ticker: TWMC
Price: $1.74
Market Cap:$55
NCAV: $114
Mkt Cap/NCAV: .48
Cash & ST Invest: $6.1
P/E:NA

Integrated Electrical Services
Ticker: IESC
Price: $3.64
Market Cap:$54
NCAV: $66
Mkt Cap/NCAV: .82
Cash & ST Invest: $32.9
P/E:NA

Duckwall Alco
Ticker: DUCK
Price: $13.87
Market Cap:$53
NCAV: $63
Mkt Cap/NCAV: .85
Cash & ST Invest: $5.4
P/E:NA

Not to sound like a broken record, but this is among the shortest list of net/nets with market caps above $50 million that we've seen in the dozen or so years we've been researching net/nets.

The author has no position in the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Last Call For JG Boswel Fundamentals Spreadsheet

We've decided to offer this spreadsheet, which includes the past 8 years of as-reported fundamental data taken directly from the annual reports, until February 1st only. Data includes the most recent fiscal year end.

If you are interested in obtaining this, please contact us at:cheapstocks@verizon.net for pricing.

*The author has a position in JG Boswell(BWEL). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Where Are All The Net/Nets? Ben Graham asked the Same Question in 1968

At this writing, we've never seen so few net/nets at any point in the decade plus that we've been studying and researching them. In fact, we currently count a total of 12 with market caps in excess of $50 million. Unfortunately (or fortunately, depending on your perspective) a rising market tide tends to lift all boats, including net/nets. We've also seen a growing population of websites covering net/nets since we started this site in 2002, which may also partially explain the lack of opportunity; there are simply more investors that have caught on to this fascinating sub-culture.

Periods of low net/net opportunity are not uncommon; even Ben Graham wriote about one such period that occurred in 1968 in the 1973 edition of Intelligent Investor. Ben wrote:

But the picture changed in the 1970 decline, and at the low prices of that year a goodly number of common stocks could have been bought at below their working capital value.

In our experience, it's more than likely that the univerese of net/nets will only grow if there is a significant market pullback. I'm not wishing that on anyone, but will continue to look for opportunity in the current crop of net/nets. Having some dry powder available is not a bad idea.

Top 5 Net/Nets by Market Cap

Imation Corp
Ticker: IMN
Price: $10.59
Market Cap:$408
NCAV: $412
Mkt Cap/NCAV: .99
Cash & ST Invest: $256.8
P/E:NA

ADPT Corp
Ticker: ADPT
Price: $2.88
Market Cap: $317
NCAV: $368.6
Mkt Cap/NCAV:.86
Cash & ST Invest: $365.8
P/E: NA

Volt Information Sciences
Ticker: VOL
Price: $8.92
Market Cap: $186
NCAV: $199
Mkt Cap/NCAV: .93
Cash & ST Invest: $145.6
P/E: 4

Audiovox
Ticker: VOXX
Price: $7.91
Market Cap: $184
NCAV: $212
Mkt Cap/NCAV:.87
Cash & ST Invest: $73.1
P/E: 9

Maxygen
Ticker: MAXY
Price: $4.04
Market Cap: $121
NCAV: $142.5
NCAV/Mkt Cap: .85
Cash & ST Invest: $152.4
P/E: NA

The author has no position in the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.