• Stock Strategies
  • How I Analyze Net-Nets: Stocks Trading at Deep Discounts

    by Jeroen Bos

    The famous investment firm Tweedy, Browne once put together an interesting publication that brought together numerous studies conducted around the world into a survey of what investing approaches have worked best over different time frames.

    The publication is called “What Has Worked in Investing” (www.tweedy.com/resources/library_docs/papers/WhatHasWorkedFundVersionWeb.pdf), and it found that value investing tends to consistently outperform other investing styles, especially in the long term.

    Tweedy, Browne went further and broke these studies down into five categories, making it easy to look for specific value strategies that have worked the best.

    The five main categories were:

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    Jeroen Bos is an investment director at Church House Investment Management in England and manages the Deep Value Investments Fund. He is also the author of “Deep Value Investing: Finding Bargain Shares With Big Potential” (Harriman House, 2013).


    Discussion

    MW from MD posted over 2 years ago:

    Thanks for this article. As a value investor, these kind of stocks are the cream of the crop, paradoxically (since most investors would consider them toxic).

    One current name that I've had my eye on is GAI. Trading right now at $5.60 a share, it has $11 in cash per share and essentially no debt. Although they've been losing money, they recently closed a factory that was unproductive, so their costs should be going down in the future. While their business model isn't rosy, I keep thinking it's so far below liquidation that it's attractive. Unless it just sits there and bleeds for several years, the value has to eventually be unlocked.

    The only potential catch is that it's based in Hong Kong. Wariness of accounting irregularities is advised on mainland Chinese companies - but should that extend in general to Hong Kong?

    Perhaps this is beyond the purview of your article, but I wanted to say thanks for the writeup.


    MW from MD posted over 2 years ago:

    Actually, I should have said, "dank u vel"!


    SD from TX posted over 2 years ago:

    AAII should think twice before publishing this type of article because the analysis of GENC is incomplete and inaccurate.
    The income statement data above is two years old! The cash flow statement is missing. A cursory look at Yahoo!Finance tells me that the company has very high volatility in earnings and cash flow. Its revenue is declining.
    The company does business on very low margin, and has booked one-time unusual income (e.g. in 3/12).

    As per Yahoo!Finance, its return-on-assets (ROA) and return-on-equity are poor. ROA is an important measure because it tells me how the company is managing capital performance on its entire capital base. ROA measures inventory-turns and sales-margin (while ignoring financial leverage).

    To maintain its reputation, AAII should not publish such junk analysis. AAII should also mention the credential of the author. Is the author CFA charterholder? How many years of experience, where and when? Is he/she registered with FINRA?


    PC from BC posted over 2 years ago:

    Is there a screener for these Net-Net stocks?


    Gene Farber from CA posted over 2 years ago:

    Good questionm PC.Does anyone know the names and locations of good fundamental screeners? Free or low cost would be good, too.


    Jeff Goodwin from CA posted over 2 years ago:

    Total current liabilities doesn't add up.

    Explain please,


    Jeff Goodwin from CA posted over 2 years ago:

    Sorry, my comment applied to GENC...


    MS from MD posted over 2 years ago:

    "Besides, the studies that Tweedy, Browne have collected over the years show that the approach
    works equally well around the world"

    Author should clarify
    what time frame 1970 to 1982 or 1970 to 2014?


    Charles Rotblut from IL posted over 2 years ago:

    MS - I'll refer you to the Tweedy Browne paper (.pdf), which is on their website.

    SD - The author states, "Such stocks also often come with a certain amount of 'baggage' and the outlook for them may seem dubious at best." I'll add that buying stocks below their net asset value is not a strategy for everyone, but it is a strategy some deep value investors do follow.

    PC and Gene - Wayne Thorp wrote an article about how to screen for Net-Net stocks in 2011. The screen can be recreated in our Stock Investor Pro program, which is a bargain at $198 per year.

    Jeff - The balance sheet shown above is in an abbreviated format with some line items excluded.

    -Charles



    George from Illinois posted over 2 years ago:

    So, where on the AAII web site does it list stocks in this category?

    I am new and would like to build a portfolio to match something that has been successful and ongoing.

    The articles are fine, but I joined looking for insights on stocks to purchase and portfolios I can model after.


    Charles Rotblut from IL posted over 2 years ago:

    Hi George,

    We don't have a specific net-net stock screen on AAII.com. Our Model Shadow Stock portfolio does follow a deep value oriented strategy, however, and may be of interest to you.

    -Charles


    Lee Wenzel from MN posted over 2 years ago:

    When I see studies of spectacular returns from deep value stocks, I always look for specific assurances that we are not seeing a survival effect. Do we know that a large number of companies did not go bust and thus disappear from the analysis? Most stocks that have fallen significantly in price either bounce back or collapse entirely.


    Charles Rotblut from IL posted over 2 years ago:

    Hi Lee,

    Our Model Shadow Stock portfolio follows a deep value approach with great long-term success. Not the methodology Jeroen describes here, but a deep value approach nonetheless. The key is being disciplined about the approach, using a filter to separate out the companies that appear undervalued from those that are cheap for a reason and being diversified.

    -CHarles


    Bruce Mengler from CA posted over 2 years ago:

    THANKS for posting the URL below
    http://www.aaii.com/journal/article/tweedy-browne-what-has-worked-in-investing

    I just made a spreadsheet using the data from 2011 & last Friday's closing prices. Even though about a half dozen of the 30 companies are no longer listed, you would have made just over $16,000 if you had bought 100 shares of each of the 30 selected stocks.

    The average initial stock price was $14.66.
    So on a $1466 initial purchase price, you would have made $550; which is in excess of a 30% or an annualized return of about 10%.


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