A Dirt Cheap Net Net
Recent C-Suite Changes Could Results in Strategic Alternatives and a Winddown
One of the best reasons to invest in nano-caps is the higher chance of finding a net-net. Net-Nets are one of the best ways to put up incredible returns with low risk and have been historically back-tested.
For those new to the concept “net-net” here is the definition.
"Net net" in finance refers to a value investing strategy where an investor buys stocks of companies whose market capitalization is significantly less than their net current asset value (NCAV), essentially meaning the company is trading for less than the value of its liquid assets, indicating a potentially undervalued stock according to this metric; this approach was popularized by investor Benjamin Graham.
To calculate if a company is a net-net all you do is take the current assets and then subtract total liabilities.
Investors who follow the net-net strategy look for companies that are trading at a significant discount to their net current asset value per share, which is often 66% or less. The idea is that buying a stock at such a discount, the investor is effectively getting the company’s operating assets for free.
Net-nets have historically outperformed the broader market with a study conducted from 1970-1983, showing that investors could have earned an average return of 29.4% annually following this strategy.
A more recent analysis by James Montier found that net-nets generated average annual returns of 35% per year.
Finding a net-net is a value investors dream.
A stock that is so cheap that it is trading at more than a 60% discount to its net current asset value.
The problem with net-nets is that they are hard to find.
Back in the day they were easy to find.
But then cheap money caused an asset bubble and multiples went bananas.
Now finding net-nets is few and far in between.
But if you search hard enough, you might be able to find one.
And that is what I did this morning.
I found a net-net. The key stats are as follows:
Key Stats of this hidden net-net:
Share price of $1.09 and net current asset value per share of $2.62 or 140% upside.
Net current assets include: cash, marketable securities, accounts receivable and a massive inventory position.
Liabilities include a small amount of debt, a small amount of accounts payable and a bit of accrued expenses.
The company also owns significant property, plant and equipment including, land, office buildings, production faculties, and machinery and equipment. The owned assets in the property, plant and equipment could easily exceed the entire market cap.
In 2021 the company sold a single facility and associated inventory for more than double the current market cap of the company today.
The company continues to own assets on their balance sheet and associated inventory that could potentially be sold for a significant amount of proceeds that could exceed the entire valuation of the company.
The long-term CEO just stepped down as of December 31, 2024. The company has hired a search firm to find a new CEO. Change at the executive level could result in strategic alternatives, or an outright liquidation, as the company is subscale.
The company has significant NOLs and will not be a cash tax payer if they return to generating net income.
The company’s product that they sell is in a multi-year trough, but in early February 2025, competitors increased price, ushering optimism for 2025. Any optimistic news on the company’s end market could result in significant increases in EBITDA and cash flow.
Despite the significant value destruction seen in the equity value of this stock, the assets appear to be real, cash flow has been generated in the past, and a new CEO could result in significant change or an outright sale of the assets.
From my analysis it appears as if there is at least one last puff on this cigar.
Let’s dig in.