Looking for profits in all the wrong places?
Real Money Columnist Jonathan Heller has an idea.
One of Heller’s favorite hunting grounds for smaller potential deep value plays are "net-nets," or companies trading below net current asset value (NCAV).
“It was once a unique place to find down-and-out names with the potential to offer compelling returns,” Heller wrote on Real Money. “These opportunities have dried up for a couple reasons, one being the overall rising tide of the markets in recent years and arguably more focus on this potential alpha source.”
Heller still runs the search anyway, partially out of nostalgia and partially because there may be some potential opportunities, especially in very volatile markets, when lower-quality names are the first to be jettisoned by nervous investors.
Recently, Heller’s search “revealed two interesting names, including one that has been on and off for a couple years.”
In the first case “Construction company Tutor Perini (TPC) trades at 0.82x NCAV and at just under 6x next year's consensus earnings estimates.”
Tutor Perini shares are down 33% over the past year, and investors have been skeptical of the stock for years based on valuations. “It does have significant debt of $968 million, but trades at just 0.46x tangible book value,” Heller noted.
In the interim since Heller ran the screen in mid February, the stock has fallen further, caught up in the volatility from Russia’s invasion of Ukraine.
What Can Happen
A second name making the cut was homebuilder Landsea Homes (LSEA) , which was trading at trades at 0.82x NCAV.
“Landsea is not only new to net/net land, but it is also new to me,” Heller wrote at the time. “It currently trades at just over 3x next year's consensus earnings estimates (with three analysts weighing in). At that level, investors are not exactly displaying a lot of confidence.”
Well, they weren't until the company's latest earnings report on March 10.
The company reported pretax income rose 244% to $49.2 million; home sales gross margins up 650 basis points to 21.5% and total revenue up 40% to $398.5 million.
And the shares? They're up 30% since Heller wrote about it.
Get more trading strategies and investing insights from the contributors on Real Money.
Please note: It is important to remember that you should not buy or sell a stock based on reading one article. Investors should do their homework. For more research and information, consider TheStreet Quant Ratings for a quantitative approach to stock selection. Or, get a daily dose of TheStreet’s smartest insights from its smartest analysts, delivered to your inbox daily via TheStreet Smarts.
