Being a Net/Net is Nothing to be Proud of...
Companies don’t typically become net/nets mysteriously. They aren’t designed that way, and it’s no badge of honor to trade at such a shockingly low valuation, (assuming your assets are real, that is) below the value of the difference between current assets and all liabilities. You get there for reasons that typically are not positive. No CFO worth his salt would be proud that his company found itself on any of our net/net lists, or as a constituent of the recently launched Cheap Stocks 21 Net/Net Index.
To become a net/net, typically much has gone wrong. Perhaps it’s been one bad quarter after another, you are sinking in debt, your products are becoming obsolete, and the market has given up on you. Perhaps its all of those reasons and more. But once you get there, there are few typical paths: Your situation improves, you become profitable again, and the market wakes up and pulls you out of the doldrums, or an acquirer sees some real value at a distressed price, and takes you out of the game. Another path may be a slow road that ultimately leads to bankruptcy. Still others remain net/nets for years, and Mr. Market, in his ultimate wisdom, has determined that your true value is already being reflected. We’ve seen companies such as Audiovoxx and Zapata perennially on the list. Interestingly, Ben Graham referred to National Presto Corp, which met his definition of a net/net, in one of his great masterpieces. National Presto was still a net/net many years later, one which we wrote about 25 years after Graham’s death!
Net/Nets are referred to as “cigar butts” for good reason. Sometimes they recover, and sometimes they don’t. Handleman (HDL), a member of the Cheap Stocks 21 Net/Net Index may just be the latest example of a net/net that does not recover. The company has fallen to $.35, a sure sign that the market believes that bankruptcy is in the future. At that level, and with deteriorating fundamentals and business conditions, the fact that such a company trades below its NCAV is of little comfort or relevance. Net/Net status is only relevant if the company is viable, or the assets are worth more than all claims (including equity) in fire sale type conditions. Stay tuned in the Handleman situation.
On another note, as markets decline, we continue to see new and potentially interesting names appear among the roles of the downtrodden net/nets. These include novelty sneaker maker Heely’s (HLYS), and small retailer and former net/net Duckwall Alco (DUCK)(search our archives for DUCK research).
As market volatility continues, we expect to see more interesting opportunities in the land of the forgotten.
*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.
Sunday, 16 March 2008
Friday, 14 March 2008
Cheap Stocks 21 Net/Net Index Down Week Ended 3/14/08
The CS21 Net/Net Index closed a very volatile week down 2.67% at 93.78. Since inception, the index is down 6.22%.
The big loser for the week, and perhaps first candidate in the index that may not survive, was music distributor Handleman(HDL), down 73% on poor earnings an extremely negative outlook, and liquidity issues. The company ended the quarter with $32 million in cash, but $90 million in short term debt, and is working with creditors to amend credit agreements. Not atypical in net/net land.
Other Losers:
Tandy Brands (TBAC): -27.7%
Trans World Entertainmet(TWMC): -19.5%
Winners Were Few and Far Between
Audiovoxx (VOXX): +9.6%
Parlux(PARL): +4%
Performance: Cheap Stocks 21 Net/Net Index vs Russell Microcap Index
Since inception (2/12/08):
CS21Net/Net: -6.22%
Russell Micro: -7.37%
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. 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.
The CS21 Net/Net Index closed a very volatile week down 2.67% at 93.78. Since inception, the index is down 6.22%.
The big loser for the week, and perhaps first candidate in the index that may not survive, was music distributor Handleman(HDL), down 73% on poor earnings an extremely negative outlook, and liquidity issues. The company ended the quarter with $32 million in cash, but $90 million in short term debt, and is working with creditors to amend credit agreements. Not atypical in net/net land.
Other Losers:
Tandy Brands (TBAC): -27.7%
Trans World Entertainmet(TWMC): -19.5%
Winners Were Few and Far Between
Audiovoxx (VOXX): +9.6%
Parlux(PARL): +4%
Performance: Cheap Stocks 21 Net/Net Index vs Russell Microcap Index
Since inception (2/12/08):
CS21Net/Net: -6.22%
Russell Micro: -7.37%
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Friday, 7 March 2008
Cheap Stocks 21 Net/Net Index Up Week Ended 3/7/08
The CS21 Net Net Index closed a rather volatile week up .87% at 96.36. Since inception, the index is down 3.64%.
The big winner for the week was retailer The Finish Line (FINL), up 58% on the heals of a settlement in the company's failed acquisition bid for Genesco. The stock popped despite announcing that q4 same store sales were down 6%.
Other Winners:
Tandy Brsnds (TBAC): +15.1%
Emerson Radio (MSN): +7.4%
Losers
Parlux Fragtances (PARL): -15.1%
FSI International (FSII): -11%
Richardson Electronics (RELL): -8.6%
Benchmarking The Index
The best way to measure The Cheap Stocks 21 Net/Net Index in terms of relative performance is via the Russell Microcap Index. Comparisons against the S&P 500, or any of the other commonly used benchmarks are simply not relevant.
The Russell Microcap Index
By Definition:*
Portfolio Characteristics
Average Market Cap($-WTD)$402 million
Median Market Cap: $193 million
Largest Company by Market Cap: $1.683 billion Smallest Company by Market Cap: $13 million
Source: Russell
Performance vs Cheap Stocks 21 Net/Net Index
Since inception (2/12/08):
CS21Net/Net: -3.64%
Russell Micro: -7%
Week Ended 3/7/08:
CS21Net/Net: +.87%
Russell Micro: -4.5%
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. 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.
The CS21 Net Net Index closed a rather volatile week up .87% at 96.36. Since inception, the index is down 3.64%.
The big winner for the week was retailer The Finish Line (FINL), up 58% on the heals of a settlement in the company's failed acquisition bid for Genesco. The stock popped despite announcing that q4 same store sales were down 6%.
Other Winners:
Tandy Brsnds (TBAC): +15.1%
Emerson Radio (MSN): +7.4%
Losers
Parlux Fragtances (PARL): -15.1%
FSI International (FSII): -11%
Richardson Electronics (RELL): -8.6%
Benchmarking The Index
The best way to measure The Cheap Stocks 21 Net/Net Index in terms of relative performance is via the Russell Microcap Index. Comparisons against the S&P 500, or any of the other commonly used benchmarks are simply not relevant.
The Russell Microcap Index
By Definition:*
The Russell Microcap Index measures the performance of the microcap segment of the U.S. equity market. It makes up less than 3% of the U.S. equity market. It includes 1000 of the smallest securities in the small-cap Russell 2000® Index based on a combination of their market cap and current index membership and it includes the next 1,000 securities.
Russell Microcap Index is constructed to provide a comprehensive and unbiased barometer for the microcap segment trading on national exchanges, while excluding lesser-regulated OTC bulletin board securities and pink-sheet stocks due to their failure to meet national exchange listing requirements. The Russell Microcap Index is completely reconstituted annually to ensure larger stocks do not distort performance and characteristics of the true microcap opportunity set.
Portfolio Characteristics
Average Market Cap($-WTD)$402 million
Median Market Cap: $193 million
Largest Company by Market Cap: $1.683 billion Smallest Company by Market Cap: $13 million
Source: Russell
Performance vs Cheap Stocks 21 Net/Net Index
Since inception (2/12/08):
CS21Net/Net: -3.64%
Russell Micro: -7%
Week Ended 3/7/08:
CS21Net/Net: +.87%
Russell Micro: -4.5%
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. 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.
Friday, 29 February 2008
Cheap Stocks 21 Net/Net Index Down 3.1% for Week ended 2/29/08
The Cheap Stocks 21 Net/Net Index ended the week at 95.53, down 3.1%. Since inception (2/12/08), the index is down 4.47%. Much of the damage occurred today, as broad markets were hit hard.
Winners for the day included Medicinova (MNVS) up 4.4%, and Nu Horizons Electronics, up 2.2%. Losers outpaced winners by a 17 to 4 margin, and included Ditech Networks (DITC) down 9%, Emerson Radio (MSN) down 7.7% and Parlux Fragrances (PARL) down 7.1%.
The index is off to quite a start--launched less than 3 weeks ago, and already down nearly 4.5%. This is not unexpected given the attributes of index constituents, and volatile markets. Stay tuned for updates.
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. 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.
The Cheap Stocks 21 Net/Net Index ended the week at 95.53, down 3.1%. Since inception (2/12/08), the index is down 4.47%. Much of the damage occurred today, as broad markets were hit hard.
Winners for the day included Medicinova (MNVS) up 4.4%, and Nu Horizons Electronics, up 2.2%. Losers outpaced winners by a 17 to 4 margin, and included Ditech Networks (DITC) down 9%, Emerson Radio (MSN) down 7.7% and Parlux Fragrances (PARL) down 7.1%.
The index is off to quite a start--launched less than 3 weeks ago, and already down nearly 4.5%. This is not unexpected given the attributes of index constituents, and volatile markets. Stay tuned for updates.
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. 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.
Friday, 22 February 2008
Cheap Stocks 21 Net/Net Index Flat for Week ended 2/22/08
The Cheap Stocks 21 Net/Net Index closed it's first full week at 98.62, flat versus last week's close. Since inception (2/12/08), the index is down 1.38%.
Winners for the week included Finish Line Inc (FINL), up 18.8%, Renovis (RNVS) up 7.9%, and Medicinova (MNVS) up 5.6%. Losers included Charles and Colvard (CTHR) down 13.8%, Replydyne (RDYN)down 13%, and Handelman (HDL) down 10%.
Price swings are wide in net/net land, and double digit gains or losses are not uncommon given the attributes of the typical net/net.
Selected Index Fundamentals
Average Market Cap: $109.7 million
Average Net Current Asset Value: $86.1 million
Market Cap/NCAV: 1.27
Total Market Cap of Index Members: $1.809 billion
Total Cash of Index Members: $1.303 billion
We've received many comments and inquiries about this index, and will attempt to respond to them all.
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. 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.
The Cheap Stocks 21 Net/Net Index closed it's first full week at 98.62, flat versus last week's close. Since inception (2/12/08), the index is down 1.38%.
Winners for the week included Finish Line Inc (FINL), up 18.8%, Renovis (RNVS) up 7.9%, and Medicinova (MNVS) up 5.6%. Losers included Charles and Colvard (CTHR) down 13.8%, Replydyne (RDYN)down 13%, and Handelman (HDL) down 10%.
Price swings are wide in net/net land, and double digit gains or losses are not uncommon given the attributes of the typical net/net.
Selected Index Fundamentals
Average Market Cap: $109.7 million
Average Net Current Asset Value: $86.1 million
Market Cap/NCAV: 1.27
Total Market Cap of Index Members: $1.809 billion
Total Cash of Index Members: $1.303 billion
We've received many comments and inquiries about this index, and will attempt to respond to them all.
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. 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.
Friday, 15 February 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.
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.
Wednesday, 6 February 2008
Patience Wears Thin on LKI: Making Room in the Portfolio
Waiting for a net/net story to unfold is often as exciting as watching paint dry, or the grass grow. That was the pretty much the story with diamond company Lazare Kaplan Intl, which we recently unloaded. You may recall our recent research piece on LKI, which was in reaction to the company’s reverse/forward split designed to reduce shareholder roles. In our view, this was a prelude for LKI to go “private”.
Shares were up 31% since, when we closed the position last week. A nice gain, yes, but we originally purchased the shares in March. 2006 at $7.75, so our 26% gain came in 22 months, after several oscillations along the way.
Why did we pull the trigger, you ask? To make room in the portfolio; to free up cash for better opportunities. Lazare Kaplan is actually coming off several consecutive marginally profitable quarters, but we’ve come to believe that this company will always be (or be very close to) a net/net.
Plum Creek Timber
We also closed our position in timber giant Plum Creek Timber, in the $43.50 range. This was another move to free up some cash. Plum Creek performed fairly well for us over the 2+ years we owned it, but we believe it is trading a little rich right now. Perhaps we’ll add back in the future.
*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.
Waiting for a net/net story to unfold is often as exciting as watching paint dry, or the grass grow. That was the pretty much the story with diamond company Lazare Kaplan Intl, which we recently unloaded. You may recall our recent research piece on LKI, which was in reaction to the company’s reverse/forward split designed to reduce shareholder roles. In our view, this was a prelude for LKI to go “private”.
Shares were up 31% since, when we closed the position last week. A nice gain, yes, but we originally purchased the shares in March. 2006 at $7.75, so our 26% gain came in 22 months, after several oscillations along the way.
Why did we pull the trigger, you ask? To make room in the portfolio; to free up cash for better opportunities. Lazare Kaplan is actually coming off several consecutive marginally profitable quarters, but we’ve come to believe that this company will always be (or be very close to) a net/net.
Plum Creek Timber
We also closed our position in timber giant Plum Creek Timber, in the $43.50 range. This was another move to free up some cash. Plum Creek performed fairly well for us over the 2+ years we owned it, but we believe it is trading a little rich right now. Perhaps we’ll add back in the future.
*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.
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