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New Life in ‘Net/Net’ Stocks

Jonathan Heller | Contributor
Tuesday, 20 Nov 2012 | 10:30 AM ET
Peter Dazeley | The Images Bank | Getty Images

There's some new life in a small subset of the deep value investing world — stocks trading below their net current asset value. Such stocks are often referred to as "net/nets."

This is one of my favorite places to look for downtrodden companies, and one I write about when I find potential opportunities. Unfortunately, the cupboard has been quite bare in recent months, and new additions have been few and far between.

But with the recent post-election, pre-"fiscal cliff" volatility we've seen in the markets, the market tree has shaken out a couple of new or returning names.

Telecommunications networking products name Tellabs is now again a net/net, returning after a hiatus of a couple of years. It is trading at 0.96 of its net current asset value (NCAV).

Companies often fall below their NCAV because their shares decline in price while the companies' balance sheets remain relatively unchanged.

In Tellabs' case, shares have fallen 28 percent in the past two months. Part of that decline is due to the company's third-quarter results released last month.

Tellabs missed the consensus estimate on revenue ($264.4 million vs. $276.5 million), but beat the earnings per share estimate (2 cents vs. 1 cent). In terms of balance sheet quality, Tellabs is loaded with cash and short-term investments to the tune of $1.14 billion, or $3.11 per share. If you back out debt of $201.6 billion, net cash and short-term investments per share are still $2.56. Tellabs closed at $2.72 yesterday.

Tellabs is also among the larger net/nets you are likely to see in terms of market cap, which hovering around $1 billion. Interestingly, Third Avenue Management, a deep-value pioneer founded by legendary value investor Marty Whitman, has built a 9.6 percent stake in this company, according to recent 13F filings. That certainly has my attention.

Although the economy is still rather weak and the future is uncertain, Tellabs appears to have the dry powder — cash and short-term investments — to see it through.

It could certainly be a bumpy road, though, and the stock could be under pressure because of Tellabs' reliance on two companies, Verizon Communications and AT&T, for about one-third of its revenue.

Also returning to the place that no company would go by choice is Richardson Electronics, which is currently trading at 0.95 of its NCAV. Shares have fallen about 12 percent the past two months. Richardson also has a strong balance sheet, ending the latest quarter with $140 million, or $8.92 per share, in cash and short-term investments.

There's also an additional $11 million, or 70 cents a share in long-term investments, primarily CDs with maturities greater than one year. All told, that's $9.62 per share in cash and investments, and there is no debt on the books. Richardson also pays a 6 cent quarterly dividend, which equates to a 2.2 percent yield.

While it's nice to see some new opportunities in net/net land, it is a bit painful getting there. Unfortunately, in the world of deep value, the old adage "no pain, no gain" applies.

—By TheStreet.com Contributor Jonathan Heller

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At the time of publication, Jonathan Heller had no positions in stocks mentioned.

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