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TheStreet Open House

Bottom Feeding for Deep Value Success Is Rare but Possible

NEW YORK ( TheStreet) -- My favorite deep value investment technique, one that many would equate to "dumpster diving" or "bottom fishing", continues to deliver compelling results. That's the good news. The bad news is that finding candidates that meet the rather stringent criteria is about as rare as a blue moon these days.

The search for companies trading below net current asset value (NCAV), or "net/nets" was first developed by Ben Graham, the father of value investing. In simplest terms, net/nets are companies whose market capitalizations are below the book value of their net current assets.

Or, to be formulaic about it, net current assets equals current assets minus total liabilities. (When applicable, I also subtract minority interests and preferred stock as well.) Ben Graham's terms, however, were a little more stringent: he looked for companies trading at less than two-thirds of their net current asset value, virtually non-existent these days.

Heading into 2013, there were just As Year Ends, Net/Net Stock Plays Are Scarce trading below NCAV with market caps greater than $100 million. Year to date, these companies are up an average of 31.5%, versus 22.6% for the Russell Microcap Value Index, which in my view is the most appropriate benchmark since most net/nets tend to be very small.

Six of the seven names are in positive return territory year to date, and the worst performer, Imation (IMN) is down about 3%. The best performer is telecommunications products name Westell Technologies (WSTL), which is up 64% year to date. Semiconductor products name FormFactor (FORM) is up 38% year to date. WSTL Chart WSTL data by YCharts

Perhaps the most recognizable name in the group was RadioShack (RSH) (+38%). The jury is still out on this one, for sure. Many believe that the company's best days are long behind it, and that it will not survive. The minority opinion, including my own, is that while a turnaround will be difficult, the company has more time to execute than the market believes.

The remaining names, Trans World Entertainment (TWMC) (38.5%) and Richardson Electronics (RELL) (+1%) represent the only names of the original seven that still trade below NCAV, as well as the only current net/nets with market caps greater than $100 million.

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