Got a nice email the other day from an OSV Insider.
He sent me the following email after I wrote about GRVY.
Carlson Capital's Double Black Diamond fund added 1.47% net of fees in May, taking its year-to-date performance to 5.2%, according to a copy of the fund's letter, which ValueWalk has been able to review. Q1 2021 hedge fund letters, conferences and more Founded in 1993 by Clint Carlson, Carlson Capital has struggled to retain assets Read More
with the help of OSV platform, I found XNET and bought it at ~4.7 because its cash > stock price.
I haven’t been looking for cheap stocks lately, but this shows they are out there. A 70% return in a couple of months means there are always pockets of value you can take advantage of before the market catches on.
How about we use the same idea and see what else is out there?
Step 1: Setting Up the Screen
Just like how the best way to catch fish is to use a fish finder to go directly where they are located, using the screener is the obvious tool of choice.
I didn’t ask what filters Chengmin used to find XNET, but here’s my screenshot of looking for cheap stocks.
I only have 2 basic filters in the screen.
- Piotroski F score, TTM between 5 and 9. Because I want to limit my choices to cheap stocks with some ok fundamentals. The Pio F score does it all for me.
- Price to NCAV between 0 and 1. Anything inside this range will mean that the NCAV is greater than the market cap. It must be between 0 and 1. If NCAV is negative, it means there is a lot of debt, and if NCAV is greater than 1, it means it is not a net net.
NCAV = Net Current Asset Value = Current Assets – Total Liabilities
By using NCAV, I’m not looking for strictly cash per se. Rather an asset rich company with decent fundamentals.
Step 2: Setting Up the Report
Once the screen is set up, it’s easy to run and load the results. To make it easier when viewing and filtering the results further, I’m going to create a custom report.
I’ll call it “Net Net Report” and I’m adding the following to the custom report list.
- market cap
- Price to NCAV
- Piotroski F score, TTM
- Action Score Grade
- Quality Score Grade
- Value Score Grade
- Growth Score Grade
This report will give the basics of what I need, and a bird’s eye view of the fundamentals and what type of company I’m looking at.
China is Still Cheap and a Checklist to Follow
What I see in the list is that many Chinese firms make the list.
If you don’t know my history with Chinese stocks, I lost a lot of money in 2011 in a Chinese Company called China MediaExpress. This was when Chinese companies became a US listed stock by buying an existing shell company. I still have a bad taste in my mouth when thinking about it.
Maybe it’s time to move on from that and see what it out there.
After all, you have the big powerhouses like Alibaba, JD.com and Tencent Holdings. Many of the smaller China scam companies have been taken down and the ones that are active today, do seem legit.
The ones I’ve highlighted below are cheap.
- CGA has a P/NVAC of 0.15
- OSN has a P/NCAV of 0.19
- BRON has a P/NCAV of 0.26
- CURE has a P/NCAV of 0.28
The Piotroski are not bad either.
I won’t go into these specific companies, because at face value, they look too good to be true.
But to look at net nets, a simple process is to stick to the following:
- Stay Within Circle of Competence – look at industries and businesses you understand
- Has a Valid Operating Business – find out whether the business is real
- Low Cash Burn – compare the cash balance each quarter and see how quickly it is going down
- No Debt or Very Easily Manageable – check debt levels and compare to cash
- No Insider Selling
- Signs of Buybacks
I’ve written about this before in this net net analysis example and checklist.
Cheap Stock Results
Using the 6 steps above, I’ve made available the list of stocks for you to go through on your own.
For the sake of this article, I’m taking it an extra step and filtering out OTC stocks.
This leaves me with the following results.
As you can see, they are all small to micro caps. I yearn for the days when net nets were bountiful.
Let’s check out a few cheap stocks.
Friedman Industries (FRD)
A perennial cheap stock. I’ve written about it previously too. Seems like whenever I make a bold claim, I’m wrong (message to self: read that lesson on being overconfident lol).
- Why Friedman Industries is My New Pick to Click
I first wrote about when it was $9.68 and the NCAV was $7.29.
I ended up selling at a loss as the economy became tougher on the company.
Today, it’s at $5.80. The market cap is $40.6m and the NCAV is $43.9M.
Since 2013, the margins have shrunk, profits have disappeared, growth has turned negative, cash balance is running low.
Using the checklist from above.
- Stay Within Circle of Competence – FAIL. Not a difficult industry, but cyclical nature makes it difficult to be successful.
- Has a Valid Operating Business – PASS. Not a shell company.
- Low Cash Burn – FAIL. Cash burn has increased. Cash balance is also low. As it failed this #3 checklist, there’s no reason to continue with FRD. But here’s what the cash burn looks like each quarter.
4. No Debt or Very Easily Manageable – skip it
5. No Insider Selling – skip it
6. Signs of Buybacks – skip it
Richardson Electronics (RELL)
Here’s another company that brings back memories.
Important point about net nets and other cheap stocks is that the majority fall back into net net range. Companies with bad business models or management may go up temporarily (a year or two), but they somehow manage to become cheap again.
What this means it hat you should not expect net nets to be a long term hold in your portfolio. Once it reaches your sell price, whether it be NCAV or a certain price, sell and move on.
In the case for RELL, its NCAV is $104.17M and market cap is $82.62M. This is a P/NCAV of 0.79. Put another way, a 20% discount to NCAV.
It’s important to check the quality of the assets. I don’t want to run into a stock like FRD where the assets decreased and lowered the NCAV and stock price.
- Stay Within Circle of Competence – PASS. I used to work in the RF and telecom industry. RELL was a competitor. It’s not difficult to understand. Just as you don’t need to know the full specs and inner workings of an iPhone, you don’t need to know 100% about the products.
- Has a Valid Operating Business – PASS.
- Low Cash Burn – PASS. Cash burn has slowed down. Makes more sense to look at RELL from an annual burn.
- No Debt or Very Easily Manageable -PASS.
- No Insider Selling – PASS
- Signs of Buybacks – FAIL. This one is good to have. Not a must have.
RELL passes the mandatory items but not a company I want to bet big on. Best to buy along with a basket of cheap stocks and distribute the allocation evenly among them to limit damage.
Download the Spreadsheet Results
Article by Jae Jun, Old School Value