Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Net-Net Stocks Are Making a Comeback in 2026
Transcript
- Lucas: You know, Luna, with the S&P 500 sitting above 7,350 and the Nasdaq near 25,300, I've been thinking about a strategy that feels almost antique — net-net stocks. Luna: Net-net as in Benjamin Graham's 'buy for less than net current asset value'? That's about as old-school as it gets. Lucas: Exactly. The formula is simple: a company's current assets minus total liabilities, divided by shares outstanding. If the stock price is below that, you've got a net-net. Luna: I love that you're bringing this up now, because everything feels so momentum-driven. If our conversations have helped you think differently about a stock or a strategy, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does keep us going. So, net-nets. They were Graham's bread and butter in the 1930s, but in a market where the S&P 500 dividend yield hit a 25-year low, they feel almost forgotten. Luna: So what's a real example today? I can't imagine many companies trade below net current asset value in this market. Lucas: There are more than you'd think, especially in small caps. One I've been looking at is Electro-Scientific Industries — ticker e s i o. They make precision equipment for electronics manufacturing. The stock trades around $12, and their net current asset value per share is roughly $15.50. Luna: So you're paying 77 cents on the dollar for the current assets alone, and you get the fixed assets and the business itself for free. Lucas: That's the thesis. Of course, the catch is that the business might be burning cash or structurally declining. ESI has had a few quarters of negative earnings, which is why the market is pricing it that way. Luna: So it's a value trap if the liquidation value is a mirage. If they keep losing money, net current assets shrink. Lucas: Right. Graham's original strategy relied on a diversified basket — he'd buy 20 or 30 net-nets, knowing some would go bankrupt, but the winners would more than compensate. In a concentrated portfolio, you need to be much more selective. Luna: What makes a net-net work in a concentrated portfolio? Are there catalysts you look for? Lucas: Catalysts are everything. For ESI, they've been cutting costs and have a new CEO who's focused on profitability. There's also an activist investor, Ancora Advisors, with a 6% stake pushing for a sale or a restructuring. Luna: So the play is that the activist unlocks value, either by selling the company at a premium to net current assets or by turning the business around. Lucas: Exactly. Without a catalyst, a net-net can just sit there and decay. That's the risk — you're waiting for the market to recognize value that might never materialize. Luna: How do you screen for these? Most screener tools don't have a net-net filter built in. Lucas: You have to compute it yourself. Start with the balance sheet. Take current assets — cash, receivables, inventory — subtract total liabilities, divide by shares outstanding. Then compare that to the stock price. A good starting point is the 'Net Current Asset Value' screen on sites like Gurufocus or simply manually filtering small caps with low price to book ratios. Luna: And you need to watch out for inventory. If inventory is obsolete, the net current asset value is overstated. Lucas: That's a key adjustment. Graham would discount inventory by 25% or ignore it entirely if it's tech-related or fashion. For ESI, their inventory is specialized but has a secondary market, so it's not worthless. Luna: So the strategy requires deep accounting work. It's not a passive screen. Lucas: It's active stock picking in its purest form. And that's exactly what this show is about. In a market where the Russell 2000 is only up 0.1% over the past five days while the S&P is flat, you need to dig to find opportunities. Luna: Are there other net-nets you're seeing right now? Or is ESI the standout? Lucas: There's a small apparel company called Delta Apparel — ticker d l a — that trades around $8 with net current assets near $11. They've been struggling with a weak retail environment, but they have a solid direct to consumer business that's growing. Luna: So again, a turnaround story. It seems like every net-net is a distressed company. Lucas: Almost by definition. If the market thought the business was healthy, the stock would trade above net current assets. That's why the strategy is contrarian — you're buying when everyone else is selling. Luna: And in a market that Jeremy Grantham just called the most expensive in American history, contrarian feels like the right posture. Lucas: Grantham's exact quote was that this is 'the most expensive market in American history' — and that's based on the Shiller P/E ratio. So net-nets offer a way to own stocks at a discount to intrinsic value, which is rare. Luna: But if you're wrong, and the company goes bankrupt, you could lose most of your investment. How do you protect against that? Lucas: Diversification within the strategy. Even a concentrated portfolio can hold five to eight net-nets. And you set a stop-loss based on the net current asset value — if the stock price drops below, say, 50% of net current assets, you sell. Luna: That's a hard discipline. Most retail investors would panic and sell at the bottom. Lucas: That's why this strategy isn't for everyone. It requires patience and a stomach for volatility. But for those who can handle it, the returns can be substantial. A study by Tweedy, Browne found that net-net baskets in the U.S. from 1970 to 2018 returned over 15% annually. Luna: Fifteen percent with a basket of 20 stocks. If you can pick the winners, you could do much better. Lucas: Or much worse. That's the thing about concentrated portfolios — they amplify both skill and luck. The key is to have a real edge in analyzing the balance sheet and the catalyst. Luna: So for the listener who wants to try this, what's your one piece of advice? Lucas: Start with a small position. Maybe 2% of your portfolio. And don't just look at the number — understand the business. If the inventory is likely to sell, if the receivables are collectible, if the liabilities are all due soon. That's the work. Luna: And if the catalyst doesn't materialize, you have to be willing to walk away. Lucas: Exactly. A net-net is a margin of safety, but it's not a guarantee. The market can stay irrational longer than you can stay solvent, as the saying goes. Luna: Well, with the market at records, it feels like a good time to have some of that graham and dodd discipline in your back pocket. Lucas: I think so. Net-nets won't make headlines, but they might just protect your portfolio when the tide goes out.