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 free net net cheap stocks 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
March 26th, 2009 at 11:59 am
Sorry for the lost comments on this post. I had to quickly transfer the database and lost the latest comments in the process.
March 27th, 2009 at 3:43 pm
how about VVTV!! nice. hope its going good for you
Mark’s last blog post..Penny Stocks, Everything In Play
March 27th, 2009 at 3:48 pm
what’s your price target on VVTV?
Mark’s last blog post..Penny Stocks, Everything In Play
March 27th, 2009 at 4:04 pm
Yeah VVTV has been rallying extremely nicely. I’m just over 100% so far but still feel its still too cheap to unload. My minimum price target is at around $1.5. If fear and uncertainty wasn’t in the stock price, I think it deserves to be around this mark.
March 28th, 2009 at 2:27 am
I’m puzzled by this Net Net discussion. (Sorry if I’m slow.) VVTV I understood — its assets were a few times higher than the total value of all shares outstanding. But with GGP, its debt seems to tower over its assets; so where is the hidden value?
March 28th, 2009 at 12:13 pm
@Ludovici
Sorry I didn’t elaborate on GGP. It’s becomes a long argument and it’s also toss up as to whether you believe it is a net net or not.
GGP is a REIT so if you don’t count their property, it isn’t worth considering. But we have to include its real estate. Even at depressed mark down prices, the property is still worth more than its liabilities.
The argument so far is that commercial real estate prices haven’t come down far enough, which ultimately means that GGP assets should be marked down further. But I don’t think it matters as much because should GGP be forced to liquidate, it would be devastating for the entire economy.
The company’s operations are doing well and able to pay its interest from operations, but it’s just the huge $3+bil in upfront cash it has to pay out that is the cause of concern.
I do believe the assets outweigh the debt though. I’ve only mentioned the broad points but I’ll provide some more details if you are interested.
March 28th, 2009 at 12:57 pm
Thanks for the response. I won’t ask you to explain it all, because most of the accounting would be beyond me, I think. But let me ask you this: I use the data I find at the Ameritrade site where I trade. Is there a better source for company data free online? It says that total debt is about 25 billion and total assets only about 1.5 billion. Property is an asset; isn’t it? I recognize that most of your readers are much more educated on these things, so I appreciate your patience.
March 28th, 2009 at 1:35 pm
It wasn’t long ago that I found it difficult to understand accounting concepts as well but it gets better as you read more.
I’ve never used the Ameritrade site but Morningstar, Google Finance, ADVFN.com are places where I get data if I need it quickly.
But what I really do is I’ve made a bookmark on my browser that links to edgar (http://sec.gov/edgar/searchedgar/companysearch.html).
From the site you enter the Ticker where it says “or CIK or Ticker Symbol:” and it will list every document the company files to the sec.
Look for the 10-Q or 10-K which is the quarterly and annual reports and it will always have the accurate information. From the balance sheet you can check for assets and yes, property is an asset.
March 29th, 2009 at 7:17 am
thanks.
March 29th, 2009 at 9:36 pm
Hey Jae. I can’t get this spreadsheet to work. Congratulations on VVTV by the way
doing your homework pays off. All the best.
March 29th, 2009 at 9:51 pm
Woops, never mind. I figured it out. Thanks for the tool Jae.
March 29th, 2009 at 11:09 pm
Jim,
Can you help by providing some feedback on this. Do I need to add any additional details or fields or do you think it is fine the way it is?
March 30th, 2009 at 11:05 am
Jae, I think the spreadsheet is fine the way it is in my opinion. Its very simple and easy to understand. For me, I like simple the best and this spreadsheet you’ve created represents that. I love your spreadsheet work. You’re really really good at that and thanks again. I saw your post on IGOI and my initial thought is that it looks like a diamond in the rough. Keep up the great work.
May 8th, 2009 at 10:53 am
(Special notice for comment subscribers)
I’ll be posting an update to the free net net spreadsheet hopefully this week.
Fixes include:
* 16 ticker inputs compared to the current 4.
* correction in the conditional formatting of cells
* delete “restricted cash” from assets since it should not be counted as assets and will inflate the price
Also, to improve the performance of load up times, open up excel and turn off the automatic formula recalculating option. That way it wont recalculate every time you enter a ticker. Just enter it once, press F9 to refresh, wait and viola.