Net net investing is a value investing strategy that involves buying stocks trading below their net current asset value. This contrarian approach searches for companies in temporary distress and aims to profit when their share prices recover. The strategy was popularized by Benjamin Graham, the father of value investing, and can generate high returns if executed properly. However, it carries high risks and requires rigorous analysis. In this article, we will explore the key concepts, pros and cons, and provide a real-world net net investing example.
Net net investing focuses on buying stocks trading below liquidation value
The core concept of net net investing is to buy stocks trading below their net current asset value per share. Net current assets are calculated by taking current assets like cash, accounts receivable and inventory, then subtracting all liabilities and preferred shares. If the stock price is lower than this net current asset value, then you are essentially buying the company’s assets for less than their liquidation value. This creates a margin of safety, as there is limited downside if the company went bankrupt and liquidated. The expectation is that as the temporary problems get resolved, the stock price will eventually recover to reflect the true net asset value.
A net net strategy aims to profit from mean reversion
A net net investing strategy aims to profit from the mean reversion of distressed or undervalued stocks. It targets companies facing temporary problems like industry downturns, lawsuits, or poor management. The goal is to buy when sentiment is extremely negative and stock prices are significantly below intrinsic value. Then as the problems fade and sentiment improves, share prices should revert back towards fair value. This mean reversion can lead to large gains if timed properly. However, it requires patience as it may take several years for net nets to recover.
Rigorous fundamental analysis is critical when selecting net nets
While net net stocks appear statistically cheap, not all will recover. Careful fundamental analysis is essential to gauge the likelihood of the company overcoming its problems. Investors need to assess the strength of the core business, capabilities of management, reasons for the undervaluation, financial health, and potential legal or industry risks. Avoiding value traps is key. Stocks with high debt, outdated products, incompetent management or unsolvable problems should be avoided regardless of statistical cheapness.
Net net investing example: The turnaround of Genco Shipping
A real world example of successful net net investing was the turnaround of Genco Shipping in the late 2000s. The dry bulk shipper fell into distress after overexpanding its fleet right before the global financial crisis. Revenues plunged as dry bulk rates collapsed. Genco traded below net current asset value for years. But a respected fund saw potential for a rebound due to its modern fleet, low relative debt and insider buying. They accumulated shares as prices lingered near liquidation value. When dry bulk rates recovered several years later, Genco’s stock shot up over 25X to eventually trade well above its net asset value.
Net net investing aims to profit from the recovery of distressed stocks trading below liquidation value. While the strategy carries high risks, it can generate high returns if executed patiently with rigorous analysis. The turnaround of Genco Shipping provides a real-world example of the potential profits.