Thanks for the well-thought-out replies. Lets take this a step further.
It is very nice to be discussing this issue with others who thoroughly understand the premise of net-net investing, and are willing to think beyond that. I have a track record on this thread of thinking beyond that too - a strategy of looking for net-nets with real estate assets, then adding the least that real estate could be worth to the net current assets. That works. Over and over again.
<<If you will accept the fact that analysts often do subtract the cash position from the market cap, then perhaps you will also accept the idea of dividing, rather than subtracting, these two quantities.>>
I always subtract cash from market cap, but I do not accept at all that your conclusion follows from that. Subtraction is very different from division. If you're talking about the difference between 2/3 of net-net and 1 times net-net, we're in the same camp - the stock trades below net current assets. But when one starts saying a stock is attractive because it trades at 2 times net-net or 3 times net-net, or start thinking net-net is the same as book value you're in dangerous territory. That was what I was responding to when I posted last night.
Let me give you a real example. NUFO has about $9 of cash per share. Its an optical technology company. I had an analyst pressuring me to buy this at 18, and he was making a Graham case - it trades at 2 times cash. An optical company at a Graham valuation. But this one illustrates the error you make by equating subtraction with division. Lets think through this one, and its real time so look at a chart of the last six months.
NUFO only has $2 of revenues per share (and needless to say no earnings). $9 of cash.
2 times cash sounds really cheap, right. But when you look at what you're buying, with $9 of cash and an $18 price, you're paying $9 for $2 of revenues and no earnings. Thats not cheap.
[So you're probably wondering how NUFO played out. Well, I should have listened to my analyst. The stock tripled. From 18 to 60. Ah, but then if went to 9 1/2. This is a volatile little bugger. At 9 1/2, the valuation would have made sense even to me, but by that time I had forgotten about it. A week later its at 16. Missed it twice, once when I should have been buying it.]
Another way of looking at this idea is this. You say net current assets is a proxy for cash, which I completely agree with. I have $80 of cash in my wallet now, and the wallet is probably worth something though its old and falling apart. If I asked a price for you to buy my wallet, would you even think twice unless that price were below $80? i.e., the "net-net" value were below 1x? If I were selling you my wallet, if I asked for 2 times cash would that mean anything different than if I asked for 1.5 times cash or 1.01 times cash? Thats why I argue that if you're doing net-net logic, the only ratios that matter are those lower than 1.
jjc |
