I have a confession to make. I yawned my way through most of The Intelligent Investor.
I know; it's sacrilege. Benjamin Graham's book is, after all, basically the holy writ of value investing. Even though his book didn't enchant me, I do hold dear some concepts introduced by our founding father.
Take, for instance, this passage, which introduces the now classic concept of a "net-net":
A good part of our own operations on Wall Street had been concentrated on the purchase of bargain issues easily identified as such by the fact that they were selling at less than their share in the net current assets (working capital) alone, not counting the plant account and other assets, and after deducting all liabilities ahead of the stock. It is clear that these issues were selling at a price well below the value of the enterprise as a private business.
At any given time, the quantity of net-nets -- the bargain issues noted above -- is a decent barometer for market optimism. During bull runs, such stocks are hard to find, but come crunch time, they begin springing up like mushrooms.
Given the current market mood, I figured it's time to dust off this long-dormant stock screening tool and see what stocks are available for a song. Here, then, are a few companies that have recently been languishing in net-net land.
You trader!
LaBranche (NYSE:LAB) has been trading stocks since 1901 -- when Ben Graham was just a boy. As one of six New York Stock Exchange specialists, the firm makes a market in more than 500 stocks, from AT&T (NYSE:T) to Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) to ExxonMobil (NYSE:XOM). LaBranche has also expanded into exchange-traded funds, options, and futures, which have now eclipsed the traditional equities specialist business in terms of revenue.
A specialist's role is to both increase liquidity and maintain a fair and orderly market. Compensation for this contribution -- a questionable one, in the eyes of some Fools -- comes in the form of a fee based on the percentage of trading volume. The specialist firm also makes money by trading for its own account.
From a brief review of the firm's very informative 10-K filing with the SEC, it's clear that this business is changing rapidly. Namely, it's going the way of the cyborg. Fans of our Motley Fool Rule Breakers service learned about some of this through the experience with Archipelago Holdings, which merged with NYSE Euronext (NYSE:NYX) in 2006. The NYSE's new HYBRID model, for instance, highly automates trade flow, and has reduced the need for specialists to manually execute trades.
Speaking of NYSE Euronext, LaBranche is sitting on several million shares received back at the time of the merger mentioned above. Aside from generating large mark-to-market losses, LaBranche's regulatory capital could be at risk if these shares were to slide further.
When stepping through the risk factors of the company's annual report, it starts to become pretty clear why these shares have been left by the curb -- which, incidentally, is where George LaBranche began trading shares of U.S. Steel back in 1901.
The little old stock picker from Pasadena
Wesco Financial (AMEX:WSC) is hardly a household name, but it's familiar to any Buffettologist worth his or her salt. That's because the firm is headed by Berkshire Hathaway Vice Chairman Charlie Munger. If you'd attended this year's annual meeting in Pasadena, you could have heard Munger rail against the financial industry's chicanery months before the true extent of the chicanery became clear.
Munger is one sharp cookie. So what's his firm's stock doing selling at net current asset value? Well, Wesco's furniture rental segment is certainly not going to amaze during a recession, but it appears to be holding up about as well as could be expected. I'm more inclined to attribute Wesco's low valuation to simple neglect more than any other factor.
If that's true, there may be a real opportunity here. Wesco hasn't traded this low since 2000, and it has some of the world's greatest capital allocators calling the shots. Buffett acts in a consultative role, and Munger's no slouch at stock picking either. The fact that a business run by disciples of Ben Graham is trading like a cigar butt strikes me as an unlikely and intriguing situation.
There are more net-nets to explore, so click my name below and shoot me an e-mail if you want this to become a regular column.
