I’ve never blogged about specific investments in the SippingCoconuts portfolio, but sometimes I think it would be useful to remind readers that there is merit to intelligent stock-picking (make sure you’re not speculating!) in addition to the usually recommended route of passive investing via index ETFs. This is particularly useful in view of the increasingly stretched valuations that we’re seeing in this quantitatively eased financial market.
What is a net-net investment?
Net-net is a value investing technique developed by Benjamin Graham in which a company is valued based solely on its net current assets. The net-net investing method focuses on current assets, taking cash and cash equivalents at full value, then reducing accounts receivable for doubtful accounts, and reducing inventories to liquidation values. Total liabilities are deducted from the adjusted current assets to get the company’s “net-net” value.
https://www.investopedia.com/terms/n/net-net.asp
Easy to define, but good ones are harder to find.
You can probably use a stock screener of some sort for Net-Nets but most are deserving of their low stock values because they are probably burning cash at such a fast rate that any value can be eroded before you get your hands on the cash.
The Current SippingCoconuts Favourite Net-Net
Since early 2018, we’ve been steadily investing in this particular SGX listed company. The investment thesis is simple, the stock is trading at say S$0.50 per share (as an example) while the company has a cash balance on the books of $0.75 per share and continues to generate a FCF yield over market cap of over 10%.
It’s been a boring investment because the stock price has been meandering about going nowhere.
Recently, however, there was a massive increase in volume mainly due to some off-market trades and the stock price spiked over 15%. Despite the 15% jump in price, I held back from selling because I knew that the intrinsic value of this stock was much higher.
Looking at the individual trades, I could see that at least two of the top 20 shareholders in this company has sold off their shares. This signal was mixed and could be interpreted as either good or bad, but there was no way for me to find out.
A few days later, there was an announcement that key insider of the company who also was the son of the founder/controlling shareholder had acquired the shares in those off-market trades as well as some from the open market. The total number of shares acquired was around S$1.3M which was at least 2x the annual salary of that director so this was a substantial purchase. (update: there was a further purchase a few days later)
Is this insider purchase a good sign? I don’t know for sure, but I am reminded of this quote:
“insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”
Peter Lynch
Happy investing!
