Mark Perkins sends: Influential market commentators have lately been implying that Ben Graham-style net current asset stocks aren’t worth looking for. This is incorrect; they not only exist but there can be good low-risk opportunities to be had in them.

When I say risk, I don’t mean beta or simply how volatile the price swings up or down are. Is it riskier to own a stock that is more volatile? Well, that depends on what you buy it for and sell it for. If a stock is down 20% at one point during the time you own it but gains 200% over a few months it is not riskier. Risk, to me, is paying to much for a stock based on company fundamentals. There is simply and clearly less risk buying a stock cheap. There are good opportunities in net current asset stocks because you can essentially buy assets for less than what they are worth. When you buy a stock selling below its net current asset value for its cash and inventory, you get the plant property and equipment of the company for free. This kind of stock is not risky if and only if the company is bringing in money or there is some kind of special situation, such as a buy out or distribution of assets to shareholders.

Looking for stocks selling around these levels is beneficial because it is an accurate metric of value. They are great to look for because most net-nets, so to speak, are smaller stocks with market capitalizations typically below $2 billion. The best performing small stocks will always outperform large stocks as they simply have more room to grow. True, most net-nets will not be five-baggers (see their stock price rise 5x) the best are good for a small pop or more. They are also often under followed by analysts meaning individuals can beat the institutions to the shares and feel comfortable knowing 20 analysts are not pouring over the stock and making overly optimistic forecasts. I personally don’t believe the market is efficient, so a cheap stock that is over-looked is likely a really, really cheap stock. Consider Alliance Semi (ALSC.PK)…

$1.08 share price
$.23 net cash and cash equivalents per share
$2.08 net cash and short-term inv.
$2.51 NCAV per share

on 33,047,882 shares of Common shares outstanding.

Alliance Semi has a long story so I’m going to make it brief so we can get to today. They have sold their entire operating business and are no longer a semi-conductor company. In 2007 they received a gain of $6.2 mil on the sale of the semi biz and a $108 mil gain selling Alliance Ventures and Solar Venture Partners. On July 17, 2007, they paid $124 mil in a special one-time cash dividend of $3.75 per share and have made some smaller payouts to shareholders. They are still sitting on a bunch of cash and don’t have any definitive plans for it yet.

There is $.23 per share in net cash. There is $2.08 per share in net cash and short-term investments. These figures are after netting out total debt, which is only $4.08 million.

They had $1.7 mil worth of Tower Semiconductor (TSEM) stock in their short-term investments. They say as of June 30th they sold off the remaining shares. In the short-term investments they have asset-backed securities with primary holdings consisting of short-term investment grade commercial paper. “We do not have any investments in securities that are collateralized by assets that include mortgages or sub prime debt. Our investments in auction-rate securities are AA-rated as of March 31, 2008, and collateralized by commercial paper, 80% of which must be rated A-1+/Prime-1 or better, and no more than 20% rated A-1/Prime-1.”

So what’s the problem? The credit markets are horrible and about all of their short-term investments which ideally would be safe are illiquid and inaccessible.
“At March 31, 2008 we held asset-backed auction-rate securities issued by sub-trusts of two master trusts, Anchorage Finance Master Trust and Dutch Harbor Finance Master Trust (the “sub-trusts”).”

“All of our auction-rate securities portfolio has been subject to failed auctions… we cannot provide assurance as to when liquidity in the regularly scheduled auctions will be restored.”
-10K

In a press release on September 3rd, the company said they had decided to continue dissolving the company and giving cash back to shareholders. This net-net has potential as the auction rate market looses and allows them to liquidate.

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For examples of past successful net-net situations, Mark points to Ashworth (ASHW) and Tandy Brands (TBAC).