tag:blogger.com,1999:blog-2149523431587168680.post5120598776414658843..comments2024-01-16T00:12:23.220-05:00Comments on Oddball Stocks: Could a net-net strategy like I used in Japan work in the US?Nate Tobikhttp://www.blogger.com/profile/05660387777171986124noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-2149523431587168680.post-48285065951833836272013-07-21T14:14:37.108-04:002013-07-21T14:14:37.108-04:00It's interesting that this post popped up: I&#...It's interesting that this post popped up: I've been struggling through this too :)<br /><br />What makes a mechanical net-net strategy compelling is that it provides an absolute measure of value versus a relative one. You can always find a group of the lowest P/B stocks, but creating a portfolio of 2/3 NCAV stocks is not always possible. Since the number of net-nets seems to go up and down with the general level of the market, maybe this could be used as an indicator to put more of your portfolio in cash or in overseas net-nets. <br /><br />Additionally, for US markets, a 2/3 of NCAV followed by a quality screen may not be the right way to go about it. Geoff Gannon has written about several net-net backtests, and he has always used the looser definition where a net-net is just a stock where current assets minus total liabilities exceed market cap with no impairment to the asset accounts. Some of these backtests returned upwards of 40% per year. <br /><br />The NCAV trifecta looks to be high insider ownership, F-score, and Z-score. I think you could look at the stocks in greater detail, but those metrics end up being a pretty good proxy for what an analyst would want in their stock portfolio. <br /><br />Insider holdings makes the most sense since greed alone should be sufficient to ensure there are enough "pops" as companies are taken private, go dark, or are sold to drive the net-net returns. <br /><br />Additionally, the more I look at F-score, it's not just a quality metric, but also has a slight momentum aspect to it since you are looking at year on year improvement in certain categories. We could almost call it a measure of fundamental momentum. <br /><br />One problem I'm having is "shaking out" all the net-nets. Even using simple screens between GuruFocus, Screener.co, Value-Investing.eu, Portfolio123, and others, and looking at exchanges like the NASDAQ, I do not get the same stocks. Once a list has been collected, I'd hand check whatever metrics I could, and then invest according to the insider holdings and F-score values as Geoff has mentioned.<br /><br />Beyond this, I would consider doing an unlisted net-net portfolio that follows the stronger form 2/3 of NCAV. Nate mentioned TTHG yesterday, which is on Unlistedstocks.net, and it's trading around 40% of NCAV. My goal would be to build a basket of 10 such stocks, or even less in combination with a looser net-net portfolio like Geoff's, and then hold for 2-3 years. <br /><br />I don't see how this could generate returns less than the market in the long-run. Maybe not 40%, but even 10% would provide more return than what most investors are expecting long-run from the S&P 500 at its current level. And unlike a S&P 500 fund, I can be assured that there is some level of asset backing along with manager's own money at stake in these stocks. <br /><br />However, I'm still a complete novice in implementing something like this, so any advice related to how to screen and ensure that the figures I need for F-score and insider holdings are accurate are greatly appreciated! Thanks so much! <br />TTTDoddernoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-66920804502093349512013-07-21T10:18:32.654-04:002013-07-21T10:18:32.654-04:00You make an important point about timing. The tim...You make an important point about timing. The time to invest net-nets and similar is after a major market dump. In 2002 and 2009, with help I had a list of stocks trading for less than cash minus all liabilities, there were numerous stocks in which you could buy cash at a discount valuing the rest of the business and assets at zero! Analysis showed you could have bought them as a basket and more than doubled your money two years later. What's left now are the dregs. Maybe there is a diamond in the rough somewhere. Bottom line is that this isn't the time to be diving into deep value stocks. This is currently a liquidity driven bull market that is raising all boats. If the debt crisis hits the inevitable wall as I expect it to within the next ten years, there will be another opportunity. In the meantime the best thing to do is go with the flow.Douglas Reifnoreply@blogger.com