Ben Graham Net-Nets That Don't File with the SEC

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Apr 09, 2012
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Today, I put in a buy order for the Ben Graham: Net-Net Newsletter’s 14th position. What makes this stock so different from past picks?

In the past, the Ben Graham: Net-Net Newsletter has never bought a stock that doesn’t file with the SEC. This month – if we get our order filled – the model portfolio will finally own a net-net that doesn’t file with the SEC.

Some net-nets don’t file with the SEC. But a lot of net-nets do. And if the idea was just to assemble a random collection of net-nets – we wouldn’t need to lift this restriction.

But my idea for the Ben Graham: Net-Net Newsletter has been to try to find the single best, single safest net-net each month. And buy that stock using a real brokerage account.

What makes a net-net the “single best, single safest” net-net?

There are a lot of ways to measure this. But probably the simplest way to separate safe net-nets from unsafe net-nets is the number of consecutive years of profits. A net-net that has been profitable in 15 of the last 15 years is usually a better net-net to buy than one that lost money last year.

How important is this?

For a small group of net-nets, the number of consecutive years of profitability is probably the single best measure to use in net-net selection if you want a higher number of good investment outcomes. In fact, if you wanted to build a net-net portfolio without doing a lot of digging into specific situations – I’d suggest focusing on the net-nets with the longest streaks of profitability.

This isn’t hard. Let’s take a tour of today’s net-nets.

How many net-nets are there right now?

By my count, there are 91 net-nets in the U.S.

And how many of those net-nets lost money in their last fiscal year?


So how many profitable net-nets are there in the United States?


Now, not all of these net-nets are “profitable” in the sense that they made money last quarter. Or, technically, even over the trailing 12 months – although most certainly did. I’m just telling you which companies had positive earnings in their last full year of results and which companies had negative earnings.

Only about 24 out of 91 U.S. net-nets had positive earnings in their last full year of results.

This wasn’t much of a problem when the Ben Graham: Net-Net Newsletter started its model portfolio – an actual brokerage account of mine – a little over a year ago. After all, 24 stocks is a fair number to choose from.

If you own zero net-nets.

But now we already own 13 net-nets. And the overlap between the net-nets on the list of 24 profitable net-nets and the net-nets in the model portfolio is significant. Right now, 7 of the 24 profitable net-nets in the U.S. are already in the Ben Graham: Net-Net Newsletter’s model portfolio.

That leaves just 17 profitable net-nets to choose from. Four of these 17 profitable net-nets are Chinese reverse merger stocks. We are never going to buy any of those stocks.

That leaves 13 profitable net-nets that are not Chinese reverse merger stocks.

This isn’t unusual. At the start of 2001, 2004, 2005 and 2006 the number of profitable net-nets in the U.S. was very low. By my count, it was in the single digits at some point during each of those years.

Since 2007, that hasn’t been as much of a problem. And certainly throughout 2009, 2010, 2011 and 2012 – there has been a constant supply of profitable U.S. net-nets. Maybe not a big supply. Certainly not a liquid supply. But an individual investor could buy 10-12 profitable U.S. net-nets throughout the year in each of the last few years.

If you were willing to buy stocks that don’t file with the SEC.

Quite a few of the net-nets with the longest records of consistent profitability don’t file with the SEC.

A list of net-nets with at least five straight years of profits is a pretty illiquid list. It’s a lot of controlled companies. I wrote about one of these companies TSR Inc. (TSRI, Financial) earlier today.

TSRI is typical of the kinds of net-nets you find on this list. The number of net-nets with five straight years of profits is about a dozen stocks. TSR is one of them. It is controlled by the founder. He formed the company 42 years ago. And he still owns 46% of the company today.

Other companies on the list of profitable net-nets also involve one man (or one family) control. These include:

· Micropac (MPAD, Financial)

· ADDvantage Technologies (AEY, Financial)

· Solitron Devices (SODI, Financial)

· OPT-Sciences (OPST, Financial)


Micropac is 76% owned by Heinz-Werner Hempel. He’s a German businessman. You can see the German company he founded here. He’s had control of Micropac for a long-time. I don’t have an exact number in front of me. But I would guess it’s been something like 25 years.


ADDvantage Technologies is controlled by the Chymiak brothers. See the company’s April 4 press release explaining their decision to turn over the CEO position to an outsider. Regardless, the Chymiaks still control 47% of the company. Ken Chymiak is now chairman. And David Chymiak is still a director and now the company’s chief technology officer. Clearly, it’s still their company.

By the way, the name ADDvantage Technologies has nothing to do with the Chymiaks. Today’s AEY really traces its roots to a private company called Tulsat. The Chymiak brothers acquired that company about 27 years ago. So, effectively, when you buy shares of AEY you are buying into a 27-year-old family-controlled company.

That’s pretty typical in the world of net-nets.


Solitron Devices is 29% owned by Shevach Saraf. He has been the CEO for 20 years. The post-bankruptcy Solitron has never known another CEO. Before the bankruptcy, Solitron was a much bigger, much different company. So even though we are not talking about the founder here – and even though 70% of the company’s shares are not held by the CEO – we’re still talking about a company where one person has a lot of control. Solitron only has three directors. Saraf is the chairman, CEO, president, CFO and treasurer. Neither of the other two directors joined the board within the last 15 years. So, we aren’t talking about a lot of tumult at the top.

In fact, profitable net-nets seem to be especially common candidates for abandoning the responsibilities of a public company without actually getting taken private.


This company is controlled by Arthur Kania. An “Arthur J. Kania Trust” owns 66% of the company (I’d put the family’s actual control closer to 70%). The president, CEO, CFO and Treasurer is one person. He happens to be Kania’s son-in-law.

The company has a three-member board: Arthur Kania, Arthur Kania Jr. (his son), and Anderson McCabe (his son-in-law).

OPT-Sciences has had the same CEO for 25 years. No board member has served for less than 25 years. Again, not a lot of tumult at the top.

One notable quirk of this company is that they don’t bother soliciting proxies. Since the company is majority controlled the board basically just goes ahead and votes first. Whenever the board meets in one place, you’ve got about 70% of the company’s share right there.

One question you might have is why McCabe runs the company if Kania owns it. Kania is 80 years old. I assume he’s really retired. He holds the title of secretary. But this is probably for legal reasons. OPT-Sciences is a New Jersey corporation. And if I remember right – I did live in New Jersey once – the state forces you to split the treasurer and secretary positions. So, you usually give the president the title of president/treasurer and give another director the secretary title.

A really neat feature of this company is that McCabe writes a letter to shareholders.

Actually, there are a couple odd features about OPT-Sciences. Despite not soliciting proxies, it is very forthcoming in its SEC reports. It files a special annual report – rather than just including it as an exhibit to the 10-K. And it provides PDF versions of a lot of what it sends the SEC. Many of OPST’s reports are better formatted than most of what is on EDGAR. And accounting items are separated into convenient lines that many companies only disclose in the notes.

For example, they go ahead and break out “land, buildings, machinery, small tools, fixtures, office equipment, and automobiles” into separate PP&E lines right there on the balance sheet. Most companies – even very, very small companies – force you to flip back and forth between the notes and the balance sheet to get a clear idea of what you’re looking at.

Why I’m Now Willing to Buy Net-Nets That Don’t File with the SEC

All those companies file with the SEC. So, what do they have to do with companies that don’t file with the SEC?

I’ve had a self-imposed ban on picking stocks that don’t file with the SEC for the Ben Graham: Net-Net Newsletter. This is despite the fact that I’m perfectly willing to buy these stocks for myself.

Why did I make this a rule?

I have no idea. Or at least I have no good idea. I do know exactly why I did it. I thought that folks who read the Ben Graham: Net-Net Newsletter would like to check the company’s financials for themselves. And they would do that through EDGAR.

That makes sense. What doesn’t make sense is that some companies that don’t file with the SEC actually make finding their annual reports even easier. They put them up on

That website is probably even easier to use than EDGAR.

Most people don’t buy net-nets for many reasons. The Ben Graham: Net-Net Newsletter can’t address all of them.

But we can talk about four of them right now:

1. The stock is too hard to trade.

2. They don’t trust the management/controlling family.

3. They don’t trust the auditors.

4. They don’t know where to get information about the company.

Well, if you go to you can find information about the company. That’s usually true even if they don’t file with the SEC. There are a few exceptions. Some companies really do disclose nothing. I’m unlikely to pick one of those stocks for the Ben Graham: Net-Net Newsletter.

So that takes care of issue No. 4. If I pick a stock for the Ben Graham: Net-Net Newsletter, I’ll make sure I mention where you can find more information about that company.

What about issue No. 1?

We’ve already solved that issue as best we can. I’m using a real brokerage account. Right now, I’ve got a little over $9,000 of my own money in these net-nets. And I add another $650 every month. I’ll keep doing this. And we’ll keep factoring in all costs – broker commissions, actual prices we paid regardless of what the last trade price was before we recommended the stock, etc. when we talk about the Ben Graham: Net-Net Newsletter’s results.

Yes. The stocks can be hard to trade sometimes. It once took us a month to get shares. Most times, it’s taken us exactly one day.

Issues No. 2 and No. 3 are the biggest concerns for investors in net-nets. Can you trust the management/controlling shareholders? And can you trust the auditors?

The answer to No. 3 is easy. If you can’t trust the controlling family, you can’t trust the auditors. If a management team is determined to commit fraud you may or may not detect it – but you certainly shouldn’t expect the auditors to detect the fraud and tell you about it. And, even if they did, you would’ve already lost most of your money.

For the most part, the issue of auditors will not be changed by whether we pick stocks that do or do not file with the SEC. In both cases, the financial statements will be audited. And in both cases it is very unlikely the auditor will be one of the Big 4.

For example, out of the 5 net-nets I mentioned in this article – all of which do still file with the SEC – only Micropac uses a Big 4 auditor. Solitron, ADDvantage, OPT-Sciences and TSR all chose smaller auditors.

It’s actually weird that Micropac uses KPMG. I was surprised when I checked their balance sheet just now that the letter was from KPMG. I hadn’t expected that. I assumed all five companies use small firms.

It’s easy to understand why. By comparing what each of these companies spends on its audits – you can see it’s possible to save about $90,000 a year by switching auditors. Two of the companies on that list are almost exactly the same size. One of them costs more than three times more to audit. Is it because the company is so different? Or because the auditor is so different?

This brings us to the reason companies – especially net-nets – give for why they want to stop filing with the SEC. It simply costs too much to comply with SEC rules.

It’s an interesting issue. I’m not sure if most companies are honest when they say that. And I tend to think it’s more an issue of time and annoyance than money. But I am sure that a lot of the most consistently profitable small net-nets in the U.S. eventually consider this route.

In reality, it may be due more to illiquidity than to anything else. When a company has a low float, it is hard to get the public’s attention. And without public attention – what point is there in filing with SEC? What point is there in staying actively traded?

A lot of net-nets have a low float. In some cases, it’s hard to find other reasons for why they are a net-net. The best explanation may be extreme illiquidity. This is especially true among higher quality net-nets. You have some very low float net-nets that are actually better businesses than some companies that consistently trade well above NCAV. They almost always have something peculiar to the way their shares were distributed that keeps their stock less liquid than you’d expect them to be based on the size of their business.

Net-nets don’t need money. Most have too much cash. They are usually not increasing their share count over time. Some are shrinking it. Almost all have shrunk their enterprise value over time. And, in a sense, any company that can operate for a long time with a very low enterprise value is a company that really doesn’t need to be public.

Just now I looked at the 11 net-nets (there was a tie) which I believe have the longest records of consistent profitability. My data isn’t perfect. Nobody’s is. But I think the picture it paints of why companies may not file with the SEC is pretty accurate.

Only 7 of the 11 companies still file with the SEC. Almost one out of every three consistently profitable net-nets doesn’t file with the SEC.

These companies are about the same size as the consistently profitable net-nets that do file with the SEC. In fact, among this group, the net-nets that don’t file are actually a little bit bigger on average than the net-nets that do file.

I don’t see a lot of differences between the two groups. They are generally all old, insider-controlled companies. They have illiquid stocks. And the ones that don’t file with the SEC were illiquid even when they were filing. Long-term growth prospects are poor. But this is usually due as much to the industry as the specific company.

What is clear is the difference between a group of consistently profitable net-nets and the much larger group of about 60 to 70 unprofitable net-nets.

Over time, I’ve come to the decision that it makes much more sense to allow the Ben Graham: Net-Net Newsletter to pick net-nets regardless of whether they file with the SEC. And the biggest reason for this decision is so the Ben Graham: Net-Net Newsletter can pick the same kinds of companies it is already picking.

It seems more important to me to pick companies that are older, more consistently profitable, etc., than to pick companies that file with the SEC.

So, from now on, the Ben Graham: Net-Net Newsletter will pick its stocks without regard to whether they file with the SEC.

Our first such pick was this month. So, it’ll be a full year before I report back to you on how our net-nets that don’t file with the SEC have done compared to our net-nets that do file with the SEC.

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