I often tell clients and investors: "If I can find one or two opportunities a quarter, I'm ecstatic." As we close out the third quarter of 2009 in a few days, I'd like to share with you some of the investments we've made. As I mentioned in this post, I simply don't have the time to maintain an F Wall Street portfolio, but that doesn't mean I haven't been investing!
We'll start with a position taken on July 27, 2009 — Volt Information Sciences. It's the company to which I alluded in this article, and then mentioned in this comment. Below is the text of an e-mail I sent to clients shortly after I bought the stock. After the text of the e-mail, I'll provide some thoughts.
Dear Joe,
Today we invested in Volt Information Sciences Inc. (NYSE:VOL, "Volt"), a provider of staffing services and telecommunications and information solutions throughout the U.S. and Europe. Odds are, you've never heard of Volt, and a quick look at the business' performance might leave you scratching your head over this one; so, let me explain.
Remember: We always want you to be as comfortable with your portfolio as we are.
Volt is a very "ordinary" business — thin profit margins in good times, and a very average return on equity under normal conditions. (Average return on equity for American businesses is around 12%.) Over the past ten years, Volt's revenues have been steadily increasing and earnings, while volatile, have also risen over time. Still, it's not the next Google.
What is it about Volt that attracts us? Ben Graham and "net-net."
Net-net: Defined
A "net" is a stock that is trading for less than its "net liquidation value" — its break-up value. You may also know these as the low "price to book" or "below liquidation value" stocks discussed in many value investing books. A "net-net" is a stock that is trading for less than its "net working capital less long-term liabilities" — basically, a company that has so much in cash, accounts receivable, and other "current assets" that it could pay off all of its liabilities (short- and long-term), and still be liquidated for less than its trading value, assuming its properties, equipment, and other long-term assets were completely worthless.
Ben Graham — the father of value investing — discussed these in both The Intelligent Investor
and Security Analysis
, and Buffett reportedly spent his early years at his partnerships investing primarily in net-nets.
The math behind net-nets is simple, and we'll illustrate it with our recent investment in Volt.
Volt as a Net-net
Volt's market capitalization — the price at which we could theoretically purchase the entire company — is about $163 million. The company reported (May 3, 2009) $633.8 million in current assets, which include cash-on-hand, accounts receivable, inventories, and other cash expected over the next twelve months.
