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New Life in Net/Net Stocks

NEW YORK ( TheStreet) -- 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 postelection, pre-fiscal cliff volatility we've seen in the markets, the market tree has shaken out a couple of new or returning names.

Telecom networking products name Tellabs (TLAB) 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.
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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% 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 EPS 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% 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 (VZ) and AT&T (T), for about one-third of its revenue.

TLAB Chart TLAB data by YCharts

Also returning to the place that no company would go by choice is Richardson Electronics (RELL - Get Report) , which is currently trading at 0.95 of its NCAV. Shares have fallen about 12% 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% yield.

RELL Chart RELL data by YCharts

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.

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

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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