The idea of investing in companies traded below Net Current Asset Value (NCAV) is quite straight forward. In his book “The Intelligent Investor”, Ben Graham, the father of value investing, found that one strategy that worked well was to buy companies that are sold at below its net current asset value. He called those bargains. As he put it:
In the years during and after the Great Depression, Ben Graham found these kind of stocks rather plentiful and made some good money on them.
GuruFocus has developed a stock screener based on Benjamin Graham’s principles and made it available to premium members (free trial available). For details on the screener, read this article, “Benjamin Graham's Net Current Asset Value Bargain Screener”.
Not surprised, lately we see a lot of stocks show up in the screener with substantial discount. Most of these companies are micro-cap stocks, with total market value under $100 million, helped by the depressed stock price per share. Some, however, are what we call “Small Cap” companies, with market value between $100 million and $1 billion. Two of these companies caught my attention: Adaptec Inc. (ADPT, Financial) and Sycamore Networks Inc. (SCMR, Financial).
1. Adaptec Inc
The digital data storage hardware and software company saw its best days in stock price back in the end of year 2000 (prospered in the Y2K scare?) when its stock traded over $60 per share. Now it is traded at $2.29. It has a market cap of $300 million.
Since year 2000, the company's business has been shrinking predictably. (see chart below).
The company has been trying to scale down and find its footing, but those efforts have not been very successful. The EBITA has been declining as well:
The investment value of the company lies with its balance sheet: as of December 2008, the company has $371 million shares of cash and equivalent and $48 million of all sorts of liability combined. If the company decides to close its door and pay all the bills, it will still have more cash left than its market cap. In other words, the company values more dead than alive.
What I found intriguing is that insiders are also buying the stock recently. First a Hedge Fund called Steel Partners II LP has kept buying into the stock since September 30, 2008. According the hedge fund’s filing, it owns more than 23 million shares (almost 20%) of the stock as of December 31, 2008. Even more interesting is that President & CEO Subramanian Sundaresh and CFO Mary Dotz each bought 10,000 shares on February 18, 2009. (see trading data below)
Source of data: GuruFocus.com.
Do the insiders know better than the rest of us?
Sycamore Networks Inc. (SCMR)
SCMR is a telecommunication equipment provider, specifically it makes fiber optics gadgets. It is another Y2K, telecommunication and dot.com bubble high flyer. Its stock price reached almost $200 per share in those days. Today it is traded at $2.15.
Business declined since year 2001 too, although recovered some lately.
But revenue has never been able to cover the cost so the company has been running a negative EBITA for the past 10 years. Now SCMR is not US goverment, that situation cannot perpetuate.
Again, like the other high tech fallen angel ADPT, the value of SCMR lies with the balance sheet: The latest balance sheet information available is for January 24, 2009. The company has $790 million of cash and short term investment, and a total liability of all kinds of $38 million, making the company also more valuable dead than alive.
Investment Guru Martin Whitman never fails to surprise us: in July 2008, he was reported to have take a 10-millions-shares position in the company. His firm, Third Avenue Management, on the other hand now controls more than 42 million (15%) shares of the company. Pleasantly, the stock has not failed much since Martin Whitman bought, having only declined 23% since July of 2008. Ironically, this might be the best investment for Martin Whitman for a while.
I guess when you hit the bottom of Net Current Asset, that is as far as it can go.
Editor Note: Real Time Guru Picks and Benjamin Graham Net Current Asset Screener, and some of the analytic tools used in this article are premium member features, click here to try them out free.
“The idea here was to acquire as many issues as possible at a cost for each of less than their book value in terms of net-cirrent-assets alone – i.e., giving no value to the plant account and other assets. Our purchases were made typically at two-thirds or less of such stripped-down asset value. In most years we carried a wide diversification here – at least 100 different issues.”
In the years during and after the Great Depression, Ben Graham found these kind of stocks rather plentiful and made some good money on them.
GuruFocus has developed a stock screener based on Benjamin Graham’s principles and made it available to premium members (free trial available). For details on the screener, read this article, “Benjamin Graham's Net Current Asset Value Bargain Screener”.
Not surprised, lately we see a lot of stocks show up in the screener with substantial discount. Most of these companies are micro-cap stocks, with total market value under $100 million, helped by the depressed stock price per share. Some, however, are what we call “Small Cap” companies, with market value between $100 million and $1 billion. Two of these companies caught my attention: Adaptec Inc. (ADPT, Financial) and Sycamore Networks Inc. (SCMR, Financial).
1. Adaptec Inc
The digital data storage hardware and software company saw its best days in stock price back in the end of year 2000 (prospered in the Y2K scare?) when its stock traded over $60 per share. Now it is traded at $2.29. It has a market cap of $300 million.
Since year 2000, the company's business has been shrinking predictably. (see chart below).
The company has been trying to scale down and find its footing, but those efforts have not been very successful. The EBITA has been declining as well:
The investment value of the company lies with its balance sheet: as of December 2008, the company has $371 million shares of cash and equivalent and $48 million of all sorts of liability combined. If the company decides to close its door and pay all the bills, it will still have more cash left than its market cap. In other words, the company values more dead than alive.
What I found intriguing is that insiders are also buying the stock recently. First a Hedge Fund called Steel Partners II LP has kept buying into the stock since September 30, 2008. According the hedge fund’s filing, it owns more than 23 million shares (almost 20%) of the stock as of December 31, 2008. Even more interesting is that President & CEO Subramanian Sundaresh and CFO Mary Dotz each bought 10,000 shares on February 18, 2009. (see trading data below)
President & CEO | 2009-02-18 | Buy | 10000 | $2.32 | -1.29 | |
CFO | 2009-02-18 | Buy | 10000 | $2.31 | -0.87 | |
10% Owner | 2008-11-18 | Buy | 252826 | $2.86 | -19.93 | |
10% Owner | 2008-11-14 | Buy | 174466 | $2.92 | -21.58 | |
10% Owner | 2008-11-12 | Buy | 204800 | $2.97 | -22.9 | |
10% Owner | 2008-11-07 | Buy | 527200 | $3 | -23.67 | |
10% Owner | 2008-10-30 | Buy | 31400 | $3 | -23.67 | |
10% Owner | 2008-10-29 | Buy | 41913 | $2.73 | -16.12 | |
10% Owner | 2008-10-27 | Buy | 325000 | $2.73 | -16.12 | |
10% Owner | 2008-09-30 | Buy | 225120 | $3.2 | -28.44 |
Source of data: GuruFocus.com.
Do the insiders know better than the rest of us?
Sycamore Networks Inc. (SCMR)
SCMR is a telecommunication equipment provider, specifically it makes fiber optics gadgets. It is another Y2K, telecommunication and dot.com bubble high flyer. Its stock price reached almost $200 per share in those days. Today it is traded at $2.15.
Business declined since year 2001 too, although recovered some lately.
But revenue has never been able to cover the cost so the company has been running a negative EBITA for the past 10 years. Now SCMR is not US goverment, that situation cannot perpetuate.
Again, like the other high tech fallen angel ADPT, the value of SCMR lies with the balance sheet: The latest balance sheet information available is for January 24, 2009. The company has $790 million of cash and short term investment, and a total liability of all kinds of $38 million, making the company also more valuable dead than alive.
Investment Guru Martin Whitman never fails to surprise us: in July 2008, he was reported to have take a 10-millions-shares position in the company. His firm, Third Avenue Management, on the other hand now controls more than 42 million (15%) shares of the company. Pleasantly, the stock has not failed much since Martin Whitman bought, having only declined 23% since July of 2008. Ironically, this might be the best investment for Martin Whitman for a while.
I guess when you hit the bottom of Net Current Asset, that is as far as it can go.
Editor Note: Real Time Guru Picks and Benjamin Graham Net Current Asset Screener, and some of the analytic tools used in this article are premium member features, click here to try them out free.
