When Is A Bad Business A Good Net-Net? (DNB, AAPL)

Someone who reads my blog sent me this email:

Hi Geoff,

A company is attractive if it is trading below NCAV and has earned a decent return on equity in the past. I can understand that. 

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But what about a company trading with a 30%+ discount to NCAV, but historically earned poor ROE, say, 7%? It is not really losing money. But it’s not making a profit over cost of capital. How should one approach this? With a stock price below book value, earnings yield will be bigger than its ROE. Does an earning yield like 15% compensate enough for the poor ROE?

My thinking is: a low ROE implies poor business and no moat, doesn’t it? And there is no reversion to the mean. So it will be a pass.

But is it that ‘there are no bad assets, only bad prices?’


That’s a great question. And there are a lot of ideas in there. So, I’m going to go through them one by one. Let’s start with the idea of a 30% plus discount to net current asset value.

Many of the stocks picked in the GuruFocus net-net newsletter have much smaller discounts to their net current assets than that. In other words, they are more expensive. They are not true Ben Graham bargains. That would be a stock selling for less than two-thirds of its net current assets.

Once again, I’ll remind everyone that:

A net-net is a stock selling for less than the value of its current assets – cash, receivables, inventory, and prepaid expenses — minus all liabilities. Basically, it’s a stock selling for less than its liquidation value.

John used that definition to show that a net-net must — by definition — always sell for less than its book value. And a stock that sells for less than its book value must also have an earnings yield (an inverted P/E ratio, that is E/P) greater than its return on equity. This is all true. A net-net that earns 7% on its equity — or book value — must earn even more on its net current assets because net current assets are always less than book value.

Full article here-When Is a Bad Business a Good Net-Net? (DNB, AAPL)