What is a net net screener?

published August 12, 2023

"Net Net Screener" refers to an app or a tool or process used by investors to identify stocks or investment opportunities that are trading at a significant discount to their net current asset value (NCAV), which is also often referred to as "net net" stocks. Net current asset value is calculated by subtracting a company’s total liabilities from its current assets, excluding intangible assets and long-term assets.

In essence, a net net screener helps investors identify companies that might be undervalued based on a time-tested and very conservative valuation approach. When a stock is trading below its net current asset value, it suggests that the market is valuing the company’s assets at a substantial discount, potentially presenting an opportunity for value investors. The market and most market participants are saying that a bankruptcy of the stock is likely, and they want to get out of the investment irrespective of price and are selling at a significant discount to the balance sheet value.

Value investors take the opposite approach: They buy whatever the market discards at low valuation where ever they think that they will be likely rewarded for their risk taking. The reason why investing in net nets works quite well on average is twofold:

First, most net-nets do not go bankrupt and make money on the investment within a year (see Wendl for details) because second: mean reversion is the most likely outcome over the next year or two. When that happens, stocks trading below liquidation value experiencing business turnaround and mean reversion is then bid up and that can result in explosive returns.

A net net example: Flexsteel industries

Let’s look at an example for this. In late 2019, Flexsteel Industries (ticker: FLXS), a boring furniture company, was trading close its net current asset value. Most likely, that was due to the fact that the company was losing money at the time. Business had dried up and the stock sold down as a result.

Business results of a 2020 net net
Business results

In response to the slowing business, the stock moved down over time and when stock market volatility showed up in March and April and May of 2020, the stock sold off further and was available below 2/3rds of Net Current Asset Value for over a month, getting as cheap as 0.56x NCAV.

Valuation chart of a net net in 2020
Valuation chart for FLXS before the volatility event

When markets turned and it became clear that the world was in fact not ending, FLXS was bid up along with other stocks and went from a low of $8.17 to a high of $50.0 one year later, resulting in a 6-bagger and then some. Even people who bought in a little early above 10 bucks achieved a 4x return if they held for a year. Such is the power of net nets.

Valuation chart after the event
Valuation chart for FLXS after the volatility event

Is every net net like that?

No, for sure not. The example of FLXS shows us what the net net strategy can occasionally uncover when volatility meets a beaten down stock with an ok business that experiences subsequent mean reversion in their business results. That said, March to May of 2020 provided an excellent opportunity set for net net investors with other similar opportunities (PFIN, HURC)

TickerNCAV multiple12 month return

Volatility and stocks trading close to NCAV and then below NCAV as volatility unfolds are the holy grail for patient net net investors. From Wendls data (see further reading at the end), 2009 and 2003 provided similar results.

How do you find net nets with a screener?

Having established what net nets are and why they can be great investments, the next step is to find them. Net nets are quite simple to find because the NCAV metric is purely quantitative in nature. For its calculation, all that we need is some information from the balance sheet, the current share price and knowledge of the amount of shares outstanding. With access to good quality financial data, this calculation is quite simple:

The net net formula according to Benjamin Graham
P/NCAV =shares outstanding · share price
Total Current Assets – Total Liabilities – Preferred Stock

You can see, that net net screening involves the following steps:

Data Gathering:
Having access to good quality financial data for various companies is crucial, including their current assets, total liabilities, preferred stock, shares outstanding and share prices.
Calculation of Net Net Value:
The net current asset value is calculated by subtracting the total liabilities from the current assets. If the resulting value is positive, it indicates potential value in the company’s assets.
Comparison with Market Price:
The net net value is then compared to the company’s market price. If the market price is significantly lower than the net net value, the company may be considered a potential net net stock.
Screening Criteria:
Investors can set specific criteria to narrow down their search, such as only considering companies trading below a certain percentage of their net net value or having a minimum market capitalization. Or you might want to remove low quality net nets via multiple filters such as the exclusion of biotech stocks or stocks in countries that you suspect can have issues.

The netnets.finance app makes all these things easy for you. We take care of all of the data gathering and updating. We have access to very good quality financial data and we run the net net calculation on our stock database daily providing you with a simple, affordable and efficient net net screening tool for your deep value net net investing. We also have various filters that make it easy to remove low quality net nets.

Filters make finding net nets easier
These filters help narrow down the list of net nets in the opportunity set
  • P/NCAV cutoff high
  • P/NCAV cutoff low
  • cheapness vs history
  • debt/equity
  • current ratio
  • market cap
  • profitability EBIT
  • profitability Net Income
  • perennial net net exclusion
  • biotech exclusion
  • Country filters

Follow up Review and individual business Analysis

After the initial screening via netnets.finance, investors can further analyze the selected companies to ensure there are no fundamental issues or substantial bankruptcy risks that might have led to the low valuation. netnets.finance is a screening tool and a starting point for further analysis. Additional due diligence is required and that involves looking at the company’s financial health, management quality, industry trends, and other relevant factors.

Please note that while net net investing can be an attractive strategy for finding deeply undervalued stocks, it also comes with certain risks. Companies trading at such low valuations may be experiencing financial distress or facing operational challenges. It is up to the individual investor to weigh these risks and underwrite the investment themselves. Netnets.finance is a mere data presentation tool and cannot perform qualitative analysis for you. These qualitative factors that might impact a company’s long-term prospects need to be thought through and understood before entering an investment. As with any investment strategy, thorough research and due diligence are essential before making investment decisions based on quantitative net net data.

Will net nets go away now that there is this screening tool?

This is the most common question I get. People assume, that because of the quantitative nature of net nets, they are easy to uncover (which is true) and thus in the future the returns from net nets will disappear. The last part, we disagree with. For one, computers are old news in 2023 and beyond. Computers have been around on Wall Street since the 1980s and in peoples homes since the early 2000s at the latest. But in 2020, when COVID hit stock markets, there were plenty of net nets around as the market became volatile. And as I type this, there are over 377 net nets in the USA alone, 82 of which are trading below 0.6x NCAV!

Related: See how many net nets there currently are

Human nature is what drives markets and the computer age has not yet changed that. For this reason, we think that net nets will persist into the future and that great returns can be made by the enterprising investor willing to buy these.

Further Reading

  • Wikipedia article on Mean Reversion
  • The Net Current Asset Value Approach to Stock Investing: A Guide to Purchasing Stocks Trading below Liquidation Value – January 13, 2013 by Victor J. Wendl (Author)