If you walk into a Tuesday Morning store, you might not be all that impressed.  It’s the epitome of closeout stores, a kind of higher-end Big Lots, or rich-man’s Family Dollar. The merchandise in this case is typically upscale home furnishings, house wares, gift items, some toys, and a very limited selection of sporting goods, to name a few.  But, this retailer, which is not small with more than 840 stores in 47 states as of last June, continues to chug through this recession.  What’s more, the company is a net/net.

It was a net/net 5 weeks ago when it hit a low price of $.51, and it’s still a net/net today, despite the fact that it’s up 319% since then.   The company was profitable on a trailing twelve month basis through December, although that’s likely to change when the company reports final third quarter numbers on April 27.

Yet shares have surged, due in part to a rising market tide, perhaps a light at the end of the economic tunnel, and the fact that Q3 sales dropped a better than expected -6.4%, while same store sales fell 9.5%.  The company, although light on details until the earnings call (other than that sales fell to $167 million from $178.4 million for the quarter; and earnings will be in the -$.15 to-$.17) also announced that trends and customer traffic appear to be improving.

With current assets of $278 million and total liabilities of $118 million, Tuesday morning’s net current asset value of $160 million is far in excess of its $91 million market cap.  Although operating in a treacherous retail environment, the company carries just $2 million in long-term debt.

Of course, retailers that don’t own their real estate, as is Tuesday Morning’s case, typically have operating leases, which don’t show on the books.  Tuesday Morning currently has $190.5 million in operating leases, which can’t and should not be ignored.

But, at its current price of $2.10, Tuesday Morning is trading more or less as a call option on what was once a pretty decent business; a call option on a pickup in the economy and consumer spending. It’s certainly not for the faint of heart, but net/nets, especially retail net/nets usually aren’t.

Tuesday Morning
Ticker: TUES
Price: $2.10
Market Cap: $91 million
Net Current Asset Value (NCAV): $160 million
Mkt Cap/NCAV: .57
P/E: 74 (through December)
Cash: $5.8 million
Debt: $ 2 million
Enterprise Value: $80 million
Locations: 842 (June, 2008)
Price/Book: .37

Jonathan Heller, CFA
Position:  Long TUES

The number of net/nets (companies trading below their net current asset value) continues to grow as the markets continue heading south. This is nothing new; the last time I saw this many net/nets (400+) was post tech bubble, post 9/11. At that time, the list was chock full of broken tech companies. Sure, there were some good names that prospered in the ensuing years, and handsomely rewarded those brave enough to deploy some capital into the land of the forgotten.

This time around, the quality of net/nets seems better, although it’s not all that surprising given the beating that the market has been taking. But I’m seeing many more profitable names, some with relatively large amounts of cash compared to the 2000-2003 period.

There are some that Ben Graham might have even taken a look at if he were alive today. Well, maybe that’s a stretch, because old Ben was pretty particular in that area. While I’ve often written about net/nets trading as those companies trading below one times net current asset value, Ben was much more stringent. He’d typically only consider those names trading at less than 2/3 of NCAV. Certainly, those have been few and far between until recently.

At last look, there were more than 200 companies trading at less than 2/3 NCAV. That’s a raw list, mind you; I ‘ve not yet verified the data, and it includes companies with a minimum market cap of $5 million, so there’s bound to be a lot junk. Moving the market cap limit to $100 million, I’ve identified a handful,

Six Companies Trading at Less than 2/3 Net Current Asset Value

Signet Jewelers (SIG)
Market Cap: $638
Net Current Asset Value: $977
Mkt Cap/NCAV: .65
Cash/Share: $.4
P/E: 4
Price: $7.48

Olympic Steel (ZEUS)
Market Cap: $123
Net Current Asset Value: $203
Mkt Cap/NCAV: .61
Cash/Share: $.22
P/E: 2
Price: $11.31

Opnext Inc (OPXT)
Market Cap: $146
Net Current Asset Value: $256
Mkt Cap/NCAV: .61
Cash/Share: $3.19
P/E: NA
Price: $1.6

Electro Scientific Industries (ESIO)
Market Cap: $146
Net Current Asset Value: $266
Mkt Cap/NCAV: .55
Cash/Share: $5.87
P/E: NA
Price: $5.4

Rackable Systems
Market Cap: $108
Net Current Asset Value: $212
Mkt Cap/NCAV: .51
Cash/Share: $5.77
P/E: NA
Price: $3.62

Movado
Market Cap: $133
Net Current Asset Value: $300
Mkt Cap/NCAV: .44
Cash/Share: $3.49
P/E: 3
Price: $5.54

If Ben Graham were alive today, would he have any interest in any of these companies? Hard to say, but I’m thinking that he’d laugh at me for even suggesting them. But that would be a small price to pay for a conversation with the master.

Jonathan Heller, CFA