Today, I thought we’d start with two of the most basic questions everybody asks about net-nets.
How many net-nets are out there? And are all net-nets micro caps?
The best net-net screen I know of says there are 142 net-nets as of yesterday.
The latest Robinhood Investors Conference is in the books, and some hedge funds made an appearance at the conference. In a panel on hedge funds moderated by Maverick Capital's Lee Ainslie, Ricky Sandler of Eminence Capital, Gaurav Kapadia of XN and Glen Kacher of Light Street discussed their own hedge funds and various aspects of Read More
Personally, I wouldn’t count some of these stocks as net-nets. Or at least not net-nets in the Ben Graham sense of the word. To Graham, a net-net was interesting because it was an actual business selling at less than its net current assets.
Yes, there are 142 stocks that meet the technical definition of a net-net. However, there are not 142 stocks that are actual operating businesses. Some of these stocks are just piles of cash.
One example is a company that sold its original business but hasn’t returned cash to shareholders. In fact, the company may never return cash to shareholders. It might buy an entirely new business.
Another example is a biotechnology company. When a biotech company that never really had a viable product is about to run out of cash it can choose to cut expenses to the bone. It can literally fire almost everybody. This leaves it in much the same position as a company that had a real business and sold it.
In both cases, the result is just a pile of cash.
A pile of cash counts as a net-net. But that isn’t the kind of company I’m talking about here. Some of the 142 stocks that count as net-nets fall into this cash pile category. It’s a small number. But it exists.
So, the actual number of Ben Graham type net-nets – legitimate businesses selling for less than their net current assets – is a bit less than 142.
Before we go on, I should lay out the exact definition for a net-net. Most of you know it. But it’s worth repeating.
A net-net is a stock with a market capitalization (last traded share price times number of shares outstanding) that is less than the company’s cash, receivables, inventory and prepaid expenses minus all of its liabilities.
This is different from two other – stricter – definitions of net-nets. The two other definitions you hear are basically a two-thirds of net current asset value formula and a kind of liquidation value.
The two-third of net current asset value formula is also based on Ben Graham’s writings. He mentions buying stocks at less than two-thirds of their net current asset value. Records show that Graham bought stocks at prices greater than two-thirds of net current asset value as well. And he knew stocks trading between two-thirds of net current asset value and 100% of net current asset value were extremely cheap.
No one disputes that.