Old School Value

I was going through the Manual of Ideas site and taking a look at the previews and samples. If you aren’t aware, Manual of Ideas is a service that focuses on deep value companies. They issue newsletters that contain a truckload of ideas on companies you’ve never heard of.

The headline “Portfolio Manager’s Review Picks Top 5 Ben Graham-Style Deep Value Investments” caught my attention since this has been the focus on Old School Value of late. The sample they have up is an 8 page report but all the “top picks” have been hidden in black but what got me more interested was the list of 100 companies passing the deep value screen. (The 100 companies list starts from page 4)

So how do you go through 100 deep value net net companies without spending hours looking up the information? Modify the existing net net investment spreadsheet so that it runs more than 4 companies simultaneously.

Let me put up the results first.

Results from 100 Companies Passing Deep Value Screen

From the initial filter, 19 companies surfaced but after checking the numbers of some companies, that number was reduced to 16. The companies in alphabetical order are as follows.

• ATV - 11% discount to liquidation net net value.
• ACTS - 40% discount
• HILL - 31% discount
• FTAR - company is liquidating and has already distributed $2. The calculated liquidation value is $3.47 which is in the ballpark of the $2.76-$3.44 declared liquidation. Judging by the current stock price, the company will be liquidated for around $3.
• GRVY - 16% discount
• HLYS - 27% discount
• HRAY - 27% discount
• HTX - 24% discount
  
• IKAN - 34% discount
• IPAS - No longer net net
• LTON - 27% discont
• MTSN - 13% discount
  
• MEMS - 4% discount
• NED - 13% discount
• NSTR - 19% discount. Liquidating at the $1.90 range.
• PDII - 24% discount
• QLTI - No longer net net. Latest filing reveals a significant decline in cash and receiables.
• SWIR - No longer net net. Company is made up of restricted cash which shouldn’t be included in liquidation.
• ELOS - Trading at liquidation value

From the list, there are quite a few Chinese companies and they all seem to have one thing in common. Holding large cash reserves. I’m not sure whether these companies are being conservative to survive the downturn or lack the commitment to return shareholder value.

Deep Value Stocks Trading at Deep Discounts to Cash

If you look at the embedded PDF below, the best net nets are the ones comprised mostly of cash compared to its total liabilities. Unless it is a company whose business model lies in acquiring receivables like ASFI, I feel it is best to find a cash loaded company.

The ones that hold a large amount cash compared to total liabilities are

• ACTS - $265 mil in cash equivalents vs $17 mil in total liabilities
• HLYS - $69 mil in cash equivalents vs $10  mil in total liabilities
• HRAY - $60 mil in cash equivalents vs $7  mil in total liabilities
• IKAN - $63 mil in cash equivalents vs $18  mil in total liabilities
• LTON - $96 mil in cash equivalents vs $17  mil in total liabilities
• MEMS - $66 mil in cash equivalents vs $3  mil in total liabilities
• NED - $151 mil in cash equivalents vs $39  mil in total liabilities
• ELOS - $197 mil in cash equivalents vs $39  mil in total liabilities

(You may have to recheck these numbers, as I may not have checked with the SEC for all).

Comments on HRAY, LTON and PDII

I recently bought HRAY, LTON and PDII where HRAY and LTON are both Chinese companies and compete with each other directly.

I listened to the past 2 conference calls and a couple of filings for HRAY and LTON and one thing that does concern me with HRAY is the management. HRAY received an offer for 51% of the company at $4 per share, but they did not respond for weeks resulting in the withdrawal of the bid. The company isn’t covered by any analysts so the conference calls didn’t offer any real insight. I’ll have to start questioning them in the next conference call. LTON on the other hand seem to have responsive management.

The big issue with China is to determine how the strict governemt regulations affect businesses as well as the mindset and mentality of businessmen compared to the west. For this reason I have never invested in China, but I’ll learn something about Chinese companies with this investment.

PDII has an interesting business model - they are a contract sales team for pharmaceutical companies. However, with the consolidation of the pharma industry, it seems like business is slow and they will continue to lose money for the rest of 2009. However, the CEO seems to be agressive and bullish in seeing change. If this does happen, I expect PDII to do very well over the long run when the economy returns.

Modified Net Net Deep Value Investment Spreadsheet

Now to what you are all interested in.

Changes include:

• Allows you to enter 20 tickers
• Deleted the restricted cash line from assets
• Fixed the conditional formatting to display a “red” or “green” properly

Download the Free Investment Spreadsheet

View instructions on how to install the spreadsheet

Net Net Deep Value Screen Results

Disclosure

I hold HRAY, LTON, PDII at the time of writing.

The installation and troubleshooting guide has been updated to include all issues so far as experienced by myself and users. Click the link for the permanent install and troubleshooting guide page.

You can download the investing spreadsheet install guide directly or refer to the embedded document below.

The micro and small cap universe is where the biggest price inefficiencies exist and it is exactly the place to find hidden gems. The good news of 2008-2009 is that mid or large caps have fallen so much they have become micro caps.

Net Nets are Cheap Stocks

Net Nets are penny stocks for a reason. Their operations have suffered dramatically or they are facing some serious short term issues that threaten to put them into bankruptcy.

Take GGP for example. Debt laden, unable to refinance and late on its payments has sent it scattering down 99%.Without getting into a debate over whether the equities have value in the face of bankruptcy, GGP could be a profitable net net.

We saw Pier 1 Imports (PIR) up 275% in a day. This is what could happen if you happen to choose correctly and the company takes corrective measures.

Net Net Working Capital Formula

For those new to net nets or need a refresher, I previously wrote about Ben Graham’s definition and calculation of Net Nets.

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities

Finding Cheap Stocks

You can find net nets by starting off with a P/B ratio less than 1 in any screener that I’ve mentioned previously as most net nets will be below book value.

A negative enterprise value screen also provides some interesting if not better results.

What to Look For

Now the real work involves weeding out the bad ones. It’s vital to look for a business that is stable so that operating losses don’t eat away the existing cash and other components of Net Net Working Capital.

If a net net has the following attributes it is definitely worth keeping an eye on.

• Activist investor or management creating a catalyst
• Company stock repurchases
• Insider buying
• A consumer brand name
• An easy to understand business

Free Graham Net Net Valuation Spreadsheet

To speed up the research process, I’ve created a spreadsheet that takes data from the last updated quarterly statements on ADVFN.com.

It takes 4 different tickers so you can compare side by side but it can support as many as you desire. Simply copy and paste.
Benjamin Graham Net Net Cheap Stock Valuation Spreadsheet

Download Section

Download the spreadsheet.

To make it work, make sure you have the SMF Add-In installed. It is a one time install.

You can download it from the SMF Yahoo Groups (requires Yahoo account) or download an older version that I use. Install guide is here.

Four Net Nets to Ponder

Adams Golf (ADGF)

Adams Golf, Inc., incorporated in 1987, designs, assembles, markets and distributes golf clubs for all skill levels.

• NNWC Price: $3.64
• Current Price: $2.63
• Discount to NNWC Price: 27%

Trident Microsystems Inc (TRID)

Trident Microsystems, Inc. (Trident) designs, develops and markets integrated circuits (ICs) and associated software for digital media applications, such as digital television, liquid crystal display (LCD) television and digital set-top boxes (STB).

• NNWC Price: $2.51
• Current Price: $1.43
• Discount to NNWC Price: 41%

Digirad Corporation (DRAD)

Digirad Corporation is a provider of cardiovascular imaging services and solid-state nuclear medicine imaging products to physician offices, hospitals and other medical services.

• NNWC Price: $1.35
• Current Price: $1.00
• Discount to NNWC Price: 26%

Amtech Systems (ASYS)

Amtech Systems, Inc. (Amtech) is a supplier of horizontal diffusion furnace systems used for solar (photovoltaic) cell and semiconductor manufacturing. The Company operates in two business segments: solar and semiconductor equipment, and polishing supplies.

• NNWC Price: $3.97
• Current Price: $3.28
• Discount to NNWC Price: 17%

Disclosure

I own GGP at the time of writing

There is a new addition to the suite of investment tools offered here at Old School Value.

By using the SMF Add-In, the new spreadsheet retrieves 10 years of annual financial statements and 20 previous quarterly financial statements from ADVFN. Morningstar has a good database, which is what I still  use in the intrinsic value spreadsheets, but this new one is very detailed.

You can now see things like how much raw materials make up inventory, the full list of items that affect Cash from Operations, the price of acquisitions and a host of financial ratios.

The free version template is simply a raw file which just retrieves the data. There is no formatting. It contains the past 6 annual statements and 7 quarterly statements.

The premium version is fully formatted and edited. 5885 individual cells had to be hand edited in order to get it working. Total time spent working on this amount to approx 30 hours as I am not much of a programmer and  had to do things the hard way.

There are no graphs at this point as I feel that graphs take the focus away from other numbers and trends that are just as important. However, should I decide to do more with it, I will provide free updates to buyers.

Trouble Shooting Notes

• To improve loading time, the spreadsheet does not perform any calculation when loaded. To start the calculation, press F9.
• Does not support financial companies
• All other troubleshooting solutions remain the same which you can find from this PDF.

Download Section

Download the Free Version.

Download PDF of the Premium Version. MSFT example.

Go here for premium version pricing. (For the price of 2 stock trades, or 3 cups of coffee, or 1 lunch, you can save yourself 30 hours of labor).

The updates to the premium intrinsic value spreadsheet has finally been released.

There have been many fixes as well as the inclusion of additional graphs that I find helpful but the biggest update of all is the “Assessment” section. This new tab allows the user to “assess” the quality of the company quickly. Points are assigned to each item and category with user input which will override the automatic values. These points are then calculated and used to automatically create a spider graph of the company.

Be sure to enable macros as it uses a button to clear the input.

For people that have bought the FULL Package within a year, you should be receiving the download link in your paypal email. If not, leave a comment with your paypal payment email and I’ll get it to you ASAP.

Get it NOW before prices go up a couples of dollars.

Refer to the sample report for KO below. Before sending questions about things not working, please read the install guide and do a search on this website as I’ve covered all the problems that you may run into.

Recently, in an effort to improve and streamline investing techniques, habits, psychological behaviours and analysis, I’ve finally gotten around to completing an addition to the premium intrinsic value spreadsheets.

Until now, I had been working with a rough screen and a checklist of things to go through with companies I am interested in, but my recent failures have prompted me to take action. The result is now a half automated screen and spider graph with user input overrides.

The additional tab in the spreadsheet acts as a checklist to check whether the company meets the characteristics and criterias I look for in companies. There is a quantitative section which deals with the numbers and a qualitative section which requires more time that focuses on the business and management.

There is also a psychological section, thanks to Value Investor India’s spreadsheet which can be found by joining his Google group, which is also based on Charlie Munger’s book.

Rather than try to explain it, refer to the screenshots and PDF of JNJ below. (Yellow cells are user input which overrides the automatic values)

I would appreciate the feedback on what I could improve and whether the filtering criterias I set are realistic or not. FYI, the excel contains detailed comments which aren’t reflected in the PDF below.

If you bought the full version of the spreadsheet within 1 year, contact me and I’ll send you a free download link when I release the new version.