Value Investing Congress West, May 5th and 6th

I'll be heading back to Pasadena in early May, to attend my fourth session of the Value Investing Congress. This has become the premier forum for value investors; an extremely well-run event that attracts quality speakers, offering compelling insights and actionable ideas. What's more, I've found the presenters to be approachable both during and after the Congress.

There's even more reason to attend this year given the markets implosion. That may sound counter-intuitive, but I believe that there's a great deal of value to be had now, for patient investors. This market has decimated some companies to the point that they've become "stupid" cheap, and there's no better event to gather intelligence from some of the greatest value investors.

The folks at The Value Investing Congress have been kind enough to extend a discount -$100 off the early bird rate for a total savings of $1300- to Cheap Stocks readers. If you are intested in attending, please click here use discount code P09CS1, which will be valid until March 15th.

Hope to see you in Pasadena!

Fertile Environment For Net/Nets

As the market doldrums continue, hope springs eternal that we will hit a bottom. But, when? Investors continue to receive their daily doses of bad news, continue to see their portfolio balances diminish, and continue to lose hope; all of which is a self fulfilling prophecy of sorts, driving the markets even lower.

The new administration is not helping matters. The hope and optimism we were bombarded with during the campaign has given way to fear, uncertainty, dire predictions if certain legislation is not passed, and an almost complete lack of confidence among consumers and investors alike. There has been no bounce; the S&P 500 is down 30% since election day, and 12% since inauguration day. With all the big spending plans, Mr. Market is signaling fear that the new agenda will not have a positive outcome. Without confidence, without hope that the recession will end and that there are better days ahead, we'll continue to be whipsawed.

Meanwhile, the list of companies trading below their net current asset value continues to rise to levels we have not seen since the tech bubble burst. As of last count there were:
433 companies with market caps greater than $5 million trading below their NCAV, including:
58 above $100 million
24 above $200 million

The difference between what we are seeing now and post tech bubble, is that today's net/nets are of much higher quality then what we saw in the early 2000's. There are dozens of profitable companies, many are loaded with cash on a relative basis, and more than we've ever seen trading below 2/3 of NCAV. In the coming weeks, we'll reveal some of the more interesting names in various categories, starting with:

Top 5 Profitable Net/Nets by market Cap

Tech Data
Ticker: TECD
P/E: 7
Market Cap: $816
NCAV: $1.415 billion
Mkt Cap/NCAV: .58
Price: $16.29
Cash/Share: $7.7

Signet Jewelers
Ticker: SIG
P/E: 4
Market Cap: $641
NCAV: $977
Mkt Cap/NCAV: .66
Price: $7.51
Cash/Share: $.4

OM Group
Ticker: OM
P/E: 3
Market Cap: $450
NCAV: $492
Mkt Cap/NCAV: .91
Price: $14.78
Cash/Share: $8.11

K-Swiss Inc
Ticker: KSWS
P/E: 10
Market Cap: $335
NCAV: $353
Mkt Cap/NCAV: .93
Price: $9.57
Cash/Share: $8.4

Skechers
Ticker: SKX
P/E: 5
Market Cap: $277
NCAV: $303
Mkt Cap/NCAV: .91
Price: $5.98
Cash/Share: $2.5

*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.

Cheap Stocks 21 Net/Net Index Completes First Year

Last year at this time, we rolled out what we believed to be the first index comprised of companies trading below their net current asset value. It was an experiment to test the notion that "passive" management of net/nets could generate above-market returns.

The CS21 Net/Net Index was down about 36% in its first year, versus -40% for the Russell Microcap Index. Hardly proves our theory about the relevance of applying a scatter gun approach to net/net investing, but we'll continue to let this index run as is rather than rebalancing, in order to judge the results over a longer time horizon.

Just two of the 21 companies in the index were in positive territory during the period, as The Finish Line rose about 80%, and Anadys Pharmaceuticals was up 280%. During the year, one company, Renovis, was acquired, and we decided not to replace it in the index.

We still plan on rolling out an additional net/net index in the near future, and are finding the quality of names much better now than those available at this time last year.

For more on the CS21 Net/Net Index, below is the original post we ran at this time last year.


February 15th 2008

Introducing the Cheap Stocks 21 Net/Net Index: The First Index of Companies Trading Below Net Current Asset Value

We’ve designed what we believe to be the first index of companies trading below their net current asset value. The main purpose of this index will be to track a passive portfolio of net/nets. This index is chock full of small companies many of which have been beaten down, and some of which may not survive. We’ve developed this index primarily as an attempt to gauge net/net performance using a basket approach.

The Cheap Stocks 21 Net/Net Index is a market cap weighted index comprised of companies that met the following criteria at index inception on Tuesday, February 12th, 2008:

•Market Cap is below net current asset value, defined as:
Current Assets – Current Liabilities – all other long term liabilities (including preferred stock, and minority interest where applicable)

•Stock Price above $1.00 per share

•Companies have an operating business; acquisition companies were excluded

•Minimum average 100 day volume of at least 5000 shares (light we know, but welcome to the wonderful world of net/nets)

*Index constituents were selected by market cap. The index is comprised of the “largest” companies meeting the above criteria.

The Index is naïve in construction in that:

•It will be rebalanced annually, and companies no longer meeting the net/net criteria will remain in the index until annual rebalancing.

•Only bankruptcies, de-listings, or acquisitions will result in replacement

•Does not discriminate by industry weighting—some industries may have heavy weights.


Cheap Stocks 21 Net/Net Index Constituents and Weights (%, rounded):

Adaptec Inc(ADPT)18.72%
Computer Systems

Audiovox Corp(VOXX)12.20%
Electronics

Trans World Entertainment(TWMC)7.58%
Retail-Music and Video

Finish Line Inc(FINL)6.30%
Retail-Apparel

Nu Horizons Electronics(NUHC)5.76%
Electronics Wholesale

Richardson Electronics(RELL)5.09%
Electronics Wholesale

Pomeroy IT Solutions(PMRY)4.61%
IT

Ditech Networks(DITC)4.31%
Communication Equip

Parlux Fragrances(PARL)3.92%
Personal Products

InFocus Corp(INFS)3.81%
Computer Peripherals

Renovis Inc(RNVS)3.80%
Biotech

Leadis Technology Inc(LDIS)3.47%
Semiconductor-Integrated Circuits

Replidyne Inc(RDYN)3.31%
Biotech

Tandy Brands Accessories Inc(TBAC)2.94%
Apparel, Footwear, Accessories

FSI International Inc(FSII)2.87%
Semiconductor Equip

Anadys Pharmaceuticals Inc(ANDS)2.49%
Biotech

MediciNova Inc(MNOV)2.33%
Biotech

Emerson Radio Corp(MSN)1.71%
Electronics

Handleman Co(HDL)1.66%
Music- Wholesale

Chromcraft Revington Inc(CRC)1.62%
Furniture

Charles & Colvard Ltd(CTHR)1.50%
Jewel Wholesale


The initial value of the Cheap Stocks Index was 100, as of the close on 2/11/08. Initially, we’ll report the index value on a weekly basis.

*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.

Retail Net/Nets Part II

The list of net/nets seems to grow longer every day, especially in retail land. This will, in all likelihood, continue as consumers hunker down, retail sales drop further, and market caps suffer as a result. In the end, once the sun comes out again, it's likely that the number of store closing and bankrutpcies will leave the survivors in very good shape. Who on our list of retail net/nets will survive? Very hard to say. We'll leave it at that for now.

Stein Mart
SMRT
Market Cap: $54.2
NCAV: $105.3
Total Debt: $100
Price: $1.28
Cash & Short Term MS: $64.8
Quick Ratio: .6

Shoe Carnival
SCVL
Market Cap: $102.3
NCAV: $133.8
Total Debt: $0
Price: $8.04
Cash & Short Term MS: $9.1
Quick Ratio: .3

Cache
CACH
Market Cap: $26.5
NCAV: $26.8
Total Debt: $4.7
Price: $2.00
Cash & Short Term MS: $25.6
Quick Ratio: 1.6


PC Connection
PCCC
Market Cap: $142.1
NCAV: $153
Total Debt: $4.5
Price: $5.25
Cash & Short Term MS: $46.8
Quick Ratio: 1.6


Tuesday Morning
TUES
Market Cap: $56.6
NCAV: $149.9
Total Debt: $36.5
Price: $1.33
Cash & Short Term MS: $4.9
Quick Ratio: .2


*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.

Retail Net/Nets Part I

Given the bad retail numbers we've been seeing- December retail sales were down 2.7% well worse than the -1.2% consensus- it's no wonder investors are shunning retailers these days. The problem is, so are consumers, given the crisis in confidence that is gripping our economy.

It's no surprise that there are now several retail net/nets, in fact, more than we've ever seen. Given the dire retail environment, it's inevitable that there will be a great deal of store closings in the next several months, and perhaps some bankruptcies as well. This certainly does not bode well for the smallest of the small, especially those that lack adequate working capital to bridge the recession, are choked with debt, or just can't weather a major pullback in sales.

In the early days of this site, we featured a couple of retail net/nets, Circuit City, and Duckwall Alco (search for these postings). Both had subsequent substantial run-ups. But times were different, and in Circuit City's case, the company at that time had a lot of cash-unlike the company that recently went under.

The risks here are many. If you do plan on "dumpster diving" in small retail net/nets, do so only with extreme caution. If you take a position, consider having a trailing stop-loss in place, which may help protect some of your capital, but is still no guarantee.

We recently had a position in AC Moore, and as the stock price increased, continued to move our trailing stop upward. But we were ultimately stopped out, on one of the many volatile trading days late in 2008. We still made a profit, but unfortunately left quite a bit on the table.

As always, proceed with caution. This is a toxic environment for retailers. We'll break the list into two parts, and run the other later this week.


Current Retail Net/Nets

A.C. Moore Arts & Crafts
ACMR
Market Cap: $29.8
NCAV: $85.1
Total Debt: $30.7
Price: $1.47
Cash & Short Term MS: $46.8
Quick Ratio: .8


MarineMax, Inc.
HZO
Market Cap: $45.1
NCAV: $130.1
Total Debt: $372
Price: $2.44
Cash & Short Term MS: $30.2
Quick Ratio: .2

Perfumania Holdings, Inc.
PERF
Market Cap: $33.9
NCAV: $42.7
Total Debt: $214
Price: $3.78
Cash & Short Term MS: $2.7
Quick Ratio: .3

West Marine, Inc.
WMAR
Market Cap: $124.2
NCAV: 151.5
Total Debt: $29.3
Price: $5.64
Cash & Short Term MS: $6
Quick Ratio: .4


Zale Corporation
ZLC
Market Cap: $91.8
NCAV: $92.7
Total Debt: $368
Price: $2.88
Cash & Short Term MS: $39.4
Quick Ratio: .3

Signet Jewelers Ltd.
SIG
Market Cap: $803
NCAV: 977.3
Total Debt: $613
Price: $9.42
Cash & Short Term MS: $36
Quick Ratio: 1.1

Duckwall-ALCO Stores, Inc
DUCK
Market Cap: $40
NCAV: 67.8
Total Debt: $56
Price: $10.50
Cash & Short Term MS: $5
Quick Ratio: .4

*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.

Looking Outside Our Narrow World of Deep Value

If you’ve been a long-time Cheap Stocks reader, you no doubt recognize that we focus on a relatively small sliver of the investment universe. Deep Value certainly isn’t the only way to invest, and net nets are not the only relevant deep value investment technique; these just happen to be the areas of the market we find most fascinating. Proper asset allocation is still imperative, something that we both embrace, and practice.

To that end, occasionally we run across a website, newsletter, or book that we see as must-read. We’ve just found such a worthy publication, which happens to focus on proper asset allocation, in a simple, easy to understand, easy to replicate, and inexpensive framework.

Jim Picerno’s (editor of the excellent Capital Spectator website), recently launched newsletter, The Beta Investment Report is perhaps the best of its kind. The inaugural issue is jam packed with practical information about building well diversified portfolios, and the ins and outs of asset allocation. It's refreshing to see that Picerno does not shy away from the great debate brought on by the near crash of most asset classes in 2008, that has shaken many investors confidence in the benefits of diversification.

Picerno, formely a writer for Bloomberg, and Wealth Manager Magazine, is a rarity in the world of journalism these days; a great writer who not only knows his craft, but is also an expert in the subject matter he writes about. His passion is obvious, and it comes through loud and clear in his writing style.

To see for yourself, Picerno is offering the inaugural issue of The Beta Investment Report for free, while a full one year subscription runs $235. Sign us up.

Cheap Stocks 21 Net Net Index Update

Its hard to believe that our index of net/nets is nearly one year old. When we introduced the index in February of 2008, we did so as an experiment. What was designed as a naively constructed cap-weighted index, CS21 has had an interesting ride.

Since inception (February 12th 2008) the CS21 Net Net Index is down 25.3%, versus -35% for the Russell Microcap Index, the closest benchmark that we can find.

While we are somehat pleased with the results, they are inconclusive at this point. Due to the extreme volatility and market performance during 2008, it was not the best time to make judgement. We'll continue to monitor this index through 2009.

Only 3 stocks in the index have performed positively since inception:
Adaptec (ADPT)
Weight: 18.7%
Performance: +19.29%

The Finish Line, Inc (FINL)
Weight: 7.57%
Performance: +119.58%

Anadys Pharmaceuticals (ANDS)
Weight: 2.53%
Performance: +134.38%

All other members were in negative territory, some more than 80%, including Leadis Technology (LDIS, -82%), Handleman (HDLM, -88%), Chromcraft Revington (CRC, -92%) and Charles and Colvard (CTHR,-83%). That's par for the course in net/net land, in fact bankruptcies are to be expected. While no index members have yet declared bankruptcy, Handelman is in liquidation. One member, Renovis, was bought out earlier in the year. Rather than replace Renovis, we opted to keep that allocation (originally 3.8%) in cash.

We are in the process of designing a new net/net index, and with the choices of available net/nets much more compelling than when we designed CS21, we look forward to unveiling it.

For more on the Cheap Stocks 21 Net Net Index, including constituents and weights, please search this site.

*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.