The latest fall in the stock market, to levels not seen since 1996, has created a new class of net-net stocks. These stocks are exciting hard-core value investors, who see opportunity in owning some of these big-name net-net stocks. Investors should be cautious, however, as some of these names may deserve to trade at such cheap valuations.

IN PICTURES: World's Greatest Investors

Benjamin Graham Lives
A net-net stock is a slang term for a company that is selling below its net current asset value (NCAV). This is calculated as the total of a company's current assets less its total liabilities (long and short term), expressed on a per share basis. This NCAV per share is then compared to its stock price. Some investors advocate buying stocks selling below their NCAVs, because the price paid incorporates a margin of safety.

The theory is that a company can be liquidated and its current assets, which presumably consist of cash and assets easily convertible to cash, can be used to satisfy all liabilities. The strategy was originally attributed to Benjamin Graham, although he advocated diversification and selectivity in purchasing net-net stocks. (Learn about the man who taught investing to the Oracle of Omaha, Warren Buffett. See The Intelligent Investor: Benjamin Graham.)

These are four stocks trading below NCAV:

Company Current Assets Total Liabilities NCAV per Share Mkt. Price PCT
Skechers USA
$602M $208M $8.55 $5.46 64%
Tech Data
$4.77B $3.30B $29.28 $16.88 58%

$1.16B $0.38M $11.98 $9.09 76%
$310M $47M $9.71 $5.06 52%
As of market close March 5, 2009

The New Net-Nets
(NYSE:SKX) sells at 64% of its NCAV. According to this investment strategy, Skechers is an extremely attractive option, as its NCAV implies that the company can be liquidated and all liabilities paid off with room to spare. The reality, however, is that parts of the current assets are inventory, which can almost never be liquidated at 100% of their balance sheet value. During the SKX conference call, management confirmed this problem and said "we began managing our inventory levels down at reduced prices and took reserves of over $15 million."

One of the largest capitalization net-net stocks trading in the marketplace is Tech Data Corp. (Nasdaq:TECD), which trades at 58% of NCAV. The company just reported GAAP net income per share of $1.17 in its first fiscal quarter, which ended Jan. 31, 2009. The company is a distributor of information technology products.

Net-Net Value
Benchmark Electronics (NYSE:BHE) is a contract manufacturer that also trades below NCAV, but at a less attractive level of 76%. The company just reported a large loss for the fourth quarter of 2008, and full year 2008, due to a write-down of goodwill with a $247 million impairment charge. (Read more in Impairment Charges: The Good, The Bad and The Ugly.)

Electro Scientific Industries (Nasdaq:ESIO) is a supplier of capital equipment to the semiconductor industry, and trades at a steep 50% of NCAV. Even more attractive is that the company had $165.74 million in cash and short-term investments at the end of 2008, although $7.1 million of this is tied up in auction rate securities. This cash balance actually exceeds its market capitalization of $138 million. The company also lost $1.08 on GAAP basis in 2008.

True Value
Although the stock market is chock full of stocks trading below net current asset value, many of these are unprofitable or have current assets tied up in non-liquid assets that shouldn't be valued at 100% of balance sheet amounts. Investors should do more research before jumping into these net-nets.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hunting Elephants

    The practice of targeting large companies or customers.
  3. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!