Net-Net's and More

The famed value investor Ben Graham used to regularly be able to dig up what he referred to as "net net" investments - companies whose current assets (adjusted by a discount factor) less their total liabilities exceeded their market caps and therefore had potential for significant stock price appreciation.

Motley Fool describes net nets like this:

http://www.fool.com/investing/small-cap/2007/03/30/net-nets-a-classic-special-situation.aspx

There is usually some sort of reason that a company's stock is trading so cheaply - like huge debt or an obsolete product, etc. With the dissemination of information so ultra efficient today, there are not a lot of these types of investments around today.

One that I have come across recently is Nautilus Inc. (ticker: NLS), maker of all manner of gym equipment and owner of Schwinn bikes. It does not fit the strict definition as outlined by Motley Fool. However, its current assets less total liabilities exceeds the current market cap by almost 50%. Essentially what the market is saying is that NLS's inventory and/or receivables are worth a lot less than what's noted on the balance sheet. That is clearly possible, but it could be worth looking at NLS as a Long position, and potentially a profitable investment if you can determine that the market is undervaluing the inventory and/or accounts receivable.

I am not putting NLS on the interest list because more homework needs to be done on the viability of its assets. But I wanted to demonstrate the concept of a (near) net net and ask you whether you know of any others worth looking into? There are tons of opportunities in the micro-cap companies for individual (retail) investors out there today.

Another name that I cannot put on the Short Interest List until someone confirms whether individuals can borrow it (a couple of months one could not) is Under Armour Inc. (ticker: UA). It had run up from its lows recently and looks expensive. At year end, there was $138 million in purchase commitments listed in the notes to the 10-k that was not there last year and amounts to 76% of total inventory on the balance sheet. The Company shed no light on it. At the same time, the Company faces a tough rollout of footwear and the management seems to have lost a bit of its well known confidence in the last couple of weeks. Let me know if this is shortable at your broker (online or otherwise).

Finally, another Short Interest List candidate, that I know has been tough to short either at work or as an individual is Green Mountain Coffee Roasters Inc. (ticker: GMCR). It is valued like it is going to the moon and it has been noted in outside Wall Street research that it changed its revenue recognition policy in the last 10-K filed with the SEC to suggest that it is booking some revenue on shipment now, rather than just delivery. Wall Street Analysts do not really know if this change added to the Company's positive 1Q09 surprise, but management is not shedding any light on things. Again, if you are able to short it in your personal account, let me know, and I would add it to the Short Interest List. From a professional standpoint, there are no shares available for my company to borrow (and then short sell).

Happy hunting!

-2outof4