Tuesday, May 20, 2014

Number of Net/Nets at an All-Time Low-Purgatory For Value Investors

When we started this site back in 2003, it was primarily focused on stocks trading below net current asset value. Over the years, we've covered other areas of deep value, but it all started with net/nets. Interestingly, in the current environment, it would make no sense to start such a site, given the dearth of companies trading below net current asset value.

In fact, we've never so few in the umpteen years that we've been researching, writing about, and investing in net/nets.

To construct a third net/net index, in the footsteps of the Cheap Stocks 21 Net/Net Index which we unveiled in February of 2008 and the Cheap Stocks 26 Net/Net Index which we rolled out in September of 2011, would be extremely difficult at this writing.

In fact, we currently find just two companies with market caps in excess of $100 million that are trading below net current asset value, Richardson Electronics and Trans World Entertainment. Next in terms of market cap at $92.5 million is Gencor Industries. From there, its a mish mosh of smaller names, which may or may not deserve a deeper dive.

Suffice it to say that the net/net cupboard is bare. The reasons, in our view are the following:
1. A rising tide has lifted all boats. Rising markets have lifted many companies out of net/net territory, which is typical coming out of the upheaval we saw in 2008 and 2009. But even that does not tell the whole story.
2. There's also been a renewed interest in net/nets over the past several years. New buyers have entered the markets, bid up prices, and many net/nets don't stay there very long. New attention has been brought by websites and other resources that have alerted investors to the potential benefits of net/net investing. This website was one of the first. In essence, we've shot ourselves in the foot, and helped drive net/nets into extinction.

Not to worry though, a market correction will ultimately re-stock the net/net shelves at least temporarily. That's not something we wish for. In fact, despite the fact that many are calling for a correction following a five-year bull run, we don't believe the markets are extremely overvalued at this point. We are certainly struggling to find much that is interesting in terms of deep value, but don't believe there's a huge bubble. It's like purgatory for value investors.

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


Anonymous said...

Hi, I am long on mflx and ceco. these look like net to me.

Jonathan Heller, CFA, Editor said...

Neither CECO or MFLX are trading below net current asset value at this writing. CECO is at 5.7 X NCAV, and MFLX 2.15X. Data used is from latest quarter.

Anonymous said...

Do you ever look at LKII these days?
Bob Eckhardt