Ben Graham popularized net-net investing in his legendary book, "The Intelligent Investor." To this day, it’s an area of the market I love to explore.
Net-net investing means investing in companies that trade at a market price that values them below the value of its cash and cash equivalents, accounts receivable (adjusted for doubtful accounts) and inventory (which you should adjust as well). The total of all liabilities is then subtracted from these current assets to arrive at a net-net value.
Obviously it is a lot of work to go through this excercise with every company in the U.S. It is much easier to use GuruFocus' Net-Net screener.
Make sure to familiarize yourself with the criteria on which it relies. Academic research shows that investing in net-nets can be incredibly lucrative and rewarding. A study spanning 1984 to 2008 found monthly returns of 2.55%. These are five of the most deeply discounted U.S. net-nets on an NCAV basis currently:
1. Gravity Co. (GRVY, Financial) mainly publishes and develops games to release in Japan and Thailand, but it is based in Korea. The company’s portfolio of games isn’t very impressive. No Angry Birds here; the most important of its titles is called Ragnarok Online, a massive multiplayer online with a declining number of players. The company is on the verge of trying to refresh its user base by issuing an update.
The company trades at roughly 60% of its net cash but has done so for quite a while. It also trades at an EV/EBIT of roughly 2x and a forward P/E of roughly 8x.
2. Avalanche Biotechnologies (AAVL, Financial) is trying to discover and develop gene therapy to help patients with ophthalmic diseases (eye diseases). Its primary potential product is called AVA-101, and it's supposed to treat wet age-related macular degeneration.
The company is trading at a 50% discount to its net cash, and it is actually being snapped up by a number of gurus including PRIMECAP Management (Trades, Portfolio) and Chuck Royce (Trades, Portfolio). Paul Tudor Jones (Trades, Portfolio) has been selling the company.
3. Verastem (VSTM, Financial):Â Ever since presidential candidate Hillary Clinton started tweeting about taking a hammer to the profits of drug companies, biotechs have been well-represented among the lists of net-nets. Verastem develops drugs to fight cancer by killing cancer stem cells. These cells are especially aggressive types of tumor cells and usually resistant to current therapies. Below I have pasted a screenshot of its most recent balance sheet from the 10-Q:
In addition, there was quite a bit of insider buying going on last year at much higher prices.
4. Emerson Radio Corp. (MSN, Financial)
Emerson Radio has a market cap of $23 million. It has no debt, $47 million in cash and makes $50 million in annual sales. The company is losing money but its operating cash flow is actually $8 million. I’m afraid its operations may not be continued as they mainly consisted of Funai leasing the company’s brand. Recently, Funai has canceled that relationship and Emerson is exploring possibilities to license its brand through other parties. It’s best not to put too much faith in Emerson as a operating company but view it as a bag of money with some overhead.
Emerson Radio has a huge Hong Kong-based shareholder who potentially could be forced to liquidate his stake (as this party is involved in some kind of restructuring). That probably creates some overhang on the stock, but it also means there is a huge shareholder very interested in monetizing this asset. In 2015 shareholders were rewarded with a special dividend of 70 cents, for example. We may see another payout like that in the future.
5. Macrocure Ltd. (MCUR, Financial)
Another biotech firm, Macrocure, develops, manufactures and markets novel cell therapy products to treat chronic and difficult to heal wounds. It has a product called CureXcell, which has so far been approved in Israel. The company describes it as follows:
CureXcell® is a cell suspension containing a white blood cell mixture that, when applied to the wound, restores the natural balance required for the wound healing process. The white blood cells are derived from a whole blood unit taken from healthy young (18-40 yrs old) donors, are activated by a safe, proprietary technique, and are subsequently applied locally to the wound. In this way, physiological cell activities, growth factor and cytokine secretions, and regulatory mechanisms are maintained as required during each of the stages of wound healing.
In order to obtain approval outside of Israel CureXcell is currently in two Phase 3, double-blind clinical trials where the company would like to obtain approval for a broad indication for the treatment of diabetic foot ulcers, or DFUs, and venous leg ulcers, or VLUs.
Apparently the market doesn’t have a lot of faith in the process because the company has a market cap of $16 million. It also has $30 million of cash in the bank and no debt. This implies the market puts a very high failure rate on the company, while the board and the CEO will stubbornly continue on the track they are on.
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Disclosure: Long Gravity Co.
