Some Intriguing Net/Nets by Jonathan Heller, CFA

As the unprecedented market volatility continues into 2009, one small sliver of the market continues to reveal interesting names.  The ranks of the net/nets (companies trading below their net current asset) continue to grow, as the market continues to punish companies, especially those on the fringe.

A recent stock screen revealed some of the largest net/nets (by market cap) that the author has seen in years.   During more “normal” market environments the typical net/net is often below the $100 million market cap range, too small for most institutions and perhaps below the comfort zone of many individual investors as well.

Very often, net/nets are “cheap” for very good reasons; and are too troubled to warrant purchase. But as we saw post tech bubble, there was money to be made in those net/nets with solid balance sheets (cash is king, inventory and receivables not so much), and real operating businesses with real prospects for improvement.

Top 5 Net/Nets by Market Cap
You may actually recognize some of the names on this list.  That’s as much a testament to the overall market devastation as it is to the potential for fishing in the net/net pond.  It’s not for the faint of heart, but if you are willing to roll up your sleeves, you might just discover a company that has the wherewithal to weather the current storm, and prosper once the sun comes out again.

Ingram Micro (IM)
Price: $12.84
Market Cap: $2120
NCAV: $2365
Mkt Cap/NCAV: .9
P/E: 7.8
Cash& ST Invest: $807
LT Debt: $359
ST Debt: $98

Tech Data (TECD)
Price: $18.73
Market Cap: $937
NCAV: $1415
Mkt Cap/NCAV: .66
P/E: 8.5
Cash& ST Invest: $385
LT Debt: $361
ST Debt: $69

Signet Jewelers (SIG)
Price: $7.70
Market Cap: $657
NCAV: $977.3
Mkt Cap/NCAV: .67
P/E: 4
Cash& ST Invest: $273
LT Debt: $380
ST Debt: $233

Sycamore Networks (SCMR)
Price: $2.43
Market Cap: $690
NCAV: $823
Mkt Cap/NCAV: .84
P/E: N/A
Cash: $823
LT Debt: $0
ST Debt: $0

Zoran Corp (ZRAN)
Price: $5.96
Market Cap: $305
NCAV: $338
Mkt Cap/NCAV: .9
P/E: N/A
Cash: $304
LT Debt: $0
ST Debt: $0

Jonathan Heller, CFA
No Positions

Alexander and Baldwin (AXB) Looks Compelling Here

I didn’t think I’d ever get another shot at A&B shares below $35, let alone in the low $20’s. But the unthinkable has happened this year in many areas of the market, and I’m pleased to find “bargains” (that’s a dangerous word for value investors) galore these days.

Honolulu based Alexander and Baldwin (AXB), books the majority of its revenue, ($1 bln out of $1.7bln in 2007) by providing ocean transport services between the US West Coast, Hawaii, and other Pacific destinations through its Matson Navigation subsidiary. Matson happens to be the primary carrier between the US and Hawaii, typically not a bad little business. However, the fuel required to operate Matson’s fleet of containerships and barges is of massive proportions; during 2007, the company burned 2.3 million barrels, the equivalent of 1/10 of one days US consumption. Matson paid between $41 and $87 per barrel during 2007, and the threat of sustained $140+ oil this past summer seemed potentially disastrous for the company’s shipping business. Little did we know at that time that oil prices were the least of our worries, as world economies sank into recession. Since September, A&B’s shares have been cut in half, and it had nothing to do with oil.

What is perhaps more interesting about Alexander and Baldwin is the company’s real estate. The company owns a portfolio of approximately 1.4 million square feet of leasable space in Hawaii, plus another 5.2 million square feet in the continental US. Add to this 89,000 acres (nearly 12 square miles) of land in Hawaii (carried on the books at next to nothing), some of which is currently under residential development, and you’ve got a potentially very interesting real estate play. Perhaps that portfolio is not as valuable as it was a year ago, but longer term, I believe its value will be recognized.

Recent financial results weren’t bad, all things considered. Third quarter sales rose 5.9%, although net income fell 25% to $36.8 million, as container shipping volume fell 5%. Still, that’s an 8% net profit margin.

Currently trading at about 7 times earnings, just .5 times sales, and about .8 times book value, A&B currently yields a fat 5.1%. Management increased the dividend 8.6% this past April, and I, for one, am happy to collect it while we all wait for the sun to rise again.

Jonathan M. Heller, CFA

Long Alexander and Baldwin