This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Net-Net vs. Free Cash Flow: 4 Kids, Kraft

This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.

The famous value investor Ben Graham was an advocate of investing in "net-nets." These are companies that are trading at less than what the cash, receivables and inventory are worth, minus total liabilities. There are not a lot of net-nets to be found, but you can find a few.

The problem is that often when you invest in a net-net, management spends down the cash in succeeding quarters. So when you revalue your stock, the company has less cash. And unfortunately, the stock reflects this fact.

Case in point: 4 Kids Entertainment (KDE). 4 Kids produces several cartoons for Fox Television (NWS) and repurposes these cartoons into trading cards and games for children. Last September, the stock was at $15, and the company held $122 million in current assets and no debt. The market value was about $200 million.

Unfortunately, 4 Kids has burned through $45 million in current assets and now is trading at half of what it was last year. On top of that, management instituted a shareholder rights plan, a "poison pill," to prevent shareholders from gaining access to that cash. That is the hard part of net-nets. Investors can't ever access the cash, because management puts in too many safeguards.

Another company with a similar situation is IDT (IDT - Get Report). IDT started off selling long-distance telephone cards. When that business got too competitive, it spread into new enterprises such as animation, debt collection, ethnic groceries and a hodgepodge of other stuff.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
GSK $40.64 0.00%
GS $184.51 0.00%
IDT $14.92 0.00%
SNY $49.23 0.00%
WMT $64.44 0.00%

Markets

Chart of I:DJI
DOW 16,351.38 +293.03 1.82%
S&P 500 1,948.86 +35.01 1.83%
NASDAQ 4,749.9790 +113.8740 2.46%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs