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Back in 1934 during the depths of the Great Depression, Graham and Dodd published the very first edition of their book: “Security Analysis”. It is the very foundation of all modern security analysis. If you are really serious about investing, you should read it (or at least one of the later editions). Most people, though, will find it too dense to get through; it is not exactly good beach reading. The key concepts are available in a much more digestible book by Ben Graham called the “Intelligent Investor”, which should be considered required reading for anyone who wants to invest on their own.

One of the key concepts in those books is that people should invest in what are known as “net net stocks”. Those are stocks where the market capitalization of the firm is less than the current assets (cash, marketable securities, receivables, inventory and pre-paid expenses) minus all current assets (accounts payable and the like) minus all long term debt. In effect, buying all of the long term assets of the company for less than nothing.

For most of the time since the end of WWII, this advice was extremely hard to follow, as stocks simply did not fall to such absurdly low levels. If it did happen, it was because most of the current assets were in inventories or receivables that were in the process of rapidly turning sour. Having a huge inventory of fresh raspberries does not make a company a good investment if those raspberries are not selling. That literally might be a problem for one of the firms on the list, but most of the vegetables they deal with are either canned or frozen.

The table below goes a step further. I also required that the company be expected to be profitable for both this year and next. I also eliminated all financial companies, since the quality of their long term assets is questionable in the current environment, and will continue to be until mark to market accounting rules are reinstated (FASB buckled to political pressure from Congress back in 2009 and eliminated the rules for financial companies). As a result I think that the book values of most financials, especially the banks, belong on the fiction, not the non-fiction shelf.

While most of these firms are not exactly giants or the best businesses the world has ever seen, I did eliminate all those with market capitalizations below $100 million. They are cheap in the extreme. If the market does not price them up in a relatively short period of time, it is a very good bet that either Private Equity firms or strategic buyers will do so. All of them could easily be swallowed up that way.

The first column shows the difference between net current assets and market capitalization (without subtracting long term debt). The second subtracts out the long term debt from the equation. The P/E ratios on these firms are not particularly high, especially if you are willing to look out to next year’s earnings. Not only that, but for all but one of these companies (West Marine) earnings next year are expected to be higher than this year. That can be seen by the difference between the P/E ratio based on this year’s earnings and the one based on next year’s earnings.

Compare the difference between the cash and marketable securities on the balance sheet to the current market capitalization. For half of the companies on the list, it is over 50%. In the case of Moog, it is over 88%. Now that is what I call a margin of safety. Indecently, Ben Graham, who was Warren Buffett’s teacher and mentor, said that “margin of safety” were the three most important words in investing. Below the table, I provide the company descriptions from Yahoo Finance. The prices are as of the close 8/19/11).

Axcelis Technologies, Inc. (ACLS - Snapshot Report), $1.90) designs, manufactures, and services ion implantation, dry strip, and other processing equipment used in the fabrication of semiconductor chips in the United States, Europe, and the Asia Pacific. Its products include a line of high energy, high current, and medium current ion implanters for various applications; and a line of single wafer implanters, known as the Optima platform, comprising the Optima HD, the Optima XE, and the Optima MD. The company also offers dry strip tools, including the Integra RS, which comprises paired-chamber process modules. In addition, it provides aftermarket services and support, including spare parts, equipment upgrades, maintenance services, and customer training. The company sells its equipment and services through direct sales force, distributors, and manufacturing representatives.

Xyratex Ltd. , $7.90) provides modular enterprise-class data storage solutions and storage process technology. The company designs, develops, and manufactures enabling technology that supports storage and data communication networks. It operates in two segments, Networked Storage Solutions and Storage Infrastructure. The Networked Storage Solutions segment offers storage subsystems that comprise modules, such as storage controllers and disk drive enclosures. It also provides RAID technology to protect users from failure of disk drives. The Storage Infrastructure segment offers hard disk drive production test equipment, media write equipment, substrate and media cleaning systems, media automation, media burnish, glide, and certify products. Xyratex Ltd sells its products to original equipment manufacturers, disk drive manufacturers, and other companies primarily in North America, Asia, and Europe.

Benchmark Electronics, Inc.
(BHE - Snapshot Report), $12.52) provides electronics manufacturing services in the Americas, Asia, and Europe. The company provides engineering solutions, such as product design, prototype, test, and related engineering solutions; and custom test and automation equipment design and build solutions. It also offers manufacturing and fulfillment solutions, including printed circuit board assembly, assembly of subsystems, circuitry and functionality testing of printed assemblies, environmental and stress testing, and component reliability testing; flex circuit assembly and test solutions; and systems assembly and test solutions, as well as environmental stress tests of assemblies of boards or systems.

In addition, the company provides precision subsystem and system integration services, including assembly, configuration, and test of complex computers and related products. Further, it offers failure analysis solutions; direct order fulfillment services, such as build-to-order and configure to order; aftermarket non-warranty services, including repair, replacement, refurbishment, remanufacturing, exchange, systems upgrade, and spare part manufacturing; value-added support services; and supply chain management solutions. The company serves original equipment manufacturers of computers and related products for business enterprises, medical devices, industrial control equipment, testing and instrumentation products, and telecommunication equipment. Benchmark Electronics markets its services directly, as well as through independent marketing representatives.

Ingram Micro Inc. (IM - Analyst Report), $16.24) and its subsidiaries distribute information technology (IT) products and supply chain solutions worldwide. The company offers various IT products, including peripherals, systems, software, networking, and others. Its peripheral products comprise printers, scanners, displays, projectors, monitors, panels, mass storage, and tape; systems products include servers, desktops, portable personal computers, and personal digital assistants; and software products consist of business application software, operating system software, entertainment software, middleware, developer software tools, security software, and storage software. The networking products include networking hardware comprising switches, hubs, routers, wireless local area networks, wireless wide area networks, network interface cards, cellular data cards, network-attached storage, and storage area networks; communication products consisting of voice over Internet protocol communications, modems, phone systems, and video/audio conferencing; and network security hardware products.

The other products comprise large format LCD and plasma displays, enclosures, mounts, media players, content software, content creation, content hosting, and installation services; processors, motherboards, hard drives, and memory; ink and toner supplies, paper, carrying cases, and anti-glare screens; cell phones, digital cameras, digital video disc players, game consoles, televisions, audio, and home control; and barcode/card printers, AIDC scanners, AIDC software, and wireless infrastructure products. The company also provides supply chain services, technical support, financial services, sales and marketing services, eCommerce services, and managed services. It markets its products and services through sales representatives, resellers, and distributors. As of January 2, 2010, the company had 103 distribution centers.

Moog Inc. $36.10) designs, manufactures, and integrates precision motion and fluid controls and systems for various applications in aerospace and defense, industrial, and medical markets. The company’s aerospace and defense products and systems include military and commercial aircraft flight controls; satellite positioning controls; controls for steering tactical and strategic missiles; thrust vector controls for space launch vehicles; controls for gun aiming, stabilization, and automatic ammunition loading in armored combat vehicles; and homeland security products. It also provides aftermarket support services. In addition, the company offers industrial products for use in a range of applications, including injection molding machines, pilot training simulators, wind energy, power generation, material and automotive testing, metal forming, heavy industry, and oil exploration. Further, its medical products consist of infusion therapy pumps; enteral clinical nutrition pumps; slip rings used on CT scanners; and motors used in sleep apnea devices. The company provides its products primarily to original equipment manufacturers and end users in the United States, China, Germany, the United Kingdom, and Japan. It sells its products through its sales personnel, as well as through distributors in industrial and medical markets.

West Marine, Inc. (WMAR) $810), together with its subsidiaries, operates as a specialty retailer of boating supplies primarily in the United States. It operates in three segments: Stores, Port Supply, and Direct Sales. The Stores segment operates stores that principally offer hardware and other supplies needed for day-to-day boat maintenance and repairs. The Port Supply segment distributes marine supplies to domestic and international wholesale customers, including businesses involved in boat sales, boat building, boat commissioning and repair, yacht chartering, marina operations, and other boating-related activities. This segment also sells its products to government and industrial customers who use the company’s products for boating and non-boating purposes.

The Direct Sales segment operates as an e-commerce Website and virtual call center, which provides customers with access to a range of products, product advisor tips and technical information, and product videos and customer-submitted product reviews. As of April 2, 2011, West Marine, Inc. offered its products through 325 company-operated stores in 38 states, Puerto Rico, and Canada, as well as through 3 franchised stores in Turkey. The company also sells its products through its call center channel and on the Internet.

Force Protection, Inc. $3.50), together with its subsidiaries, engages in the design, manufacture, testing, delivery, and support of blast- and ballistic-protected vehicles. The company’s specialty vehicles protect their occupants from landmines, hostile fire, and improvised explosive devices (IEDs). Its vehicle platforms comprise Buffalo, a mine protected clearance vehicle; Cougar, a family of medium-sized blast- and ballistic-protected vehicles, which are supplied in 4-wheeled and 6-wheeled variants, as well as in various other configurations; Cheetah, a lighter weight 4-wheeled blast- and ballistic-protected vehicle; and Joint All-Terrain Modular Mobility Asset, a light-weight, high-performance, and high-speed all-terrain vehicle.

The company also offers external ballistic protection modules that provide protection from explosively formed projectiles and other IEDs; and develops products to protect against rocket-propelled grenades, as well as to mitigate blast effects on other military vehicles. It provides spares and sustainment services for its vehicles that involve development of technical data packages, supply of spares, field and depot maintenance activities, assignment of assignment of field service representatives to units that are equipped with its vehicles, and related programs. The company offers its services primarily to the U.S. Army, the U.S. Marine Corps, the U.S. military branches of service, and foreign militaries; and the U.K. Ministry of Defense.

Seneca Foods Corporation $20.56) engages in the production and distribution of processed fruits and vegetables, frozen vegetables, and other food products in the United States. Its products include canned, frozen, and bottled produce and snack chips that are sold under private label, as well as national and regional brands that it owns or licenses, including Seneca, Libby’s, Aunt Nellie’s Farm Kitchen, Stokely’s, Read, and Diamond A. The company packs Green Giant, Le Sueur, and other brands of canned vegetables, as well as selects Green Giant frozen vegetables for General Mills Operations, LLC under its alliance agreement. It sells its products through grocery outlets, including supermarkets, mass merchandisers, limited assortment stores, club stores, and dollar stores to food service distributors, industrial markets, other food processors, and export customers in 75 countries, as well as federal, state, and local governments for school and other feeding programs.


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