A Japanese Net-Net for 2x FCF
Also includes a 6% dividend yield while we hold the stock.
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Every deep-value investor eventually runs into the same problem.
You find a business trading below the value of its net current assets.
The balance sheet is pristine.
The company still makes money.
The dividend is well covered.
You’d definitely buy the business in the real-world, at the absurd market cap or EV.
But the market calls it a value trap.
The weird truth is that many cigar butts and net-nets never rerate.
The reason the strategy works has never been that every individual investment turns into a winner.
The portfolio does most of the heavy lifting.
You build a collection of businesses where the downside is protected by cash, working capital, property and conservative balance sheets.
Most continue operating exactly as they always have.
Some quietly send cash back to shareholders for years.
Then one or two receive an unexpected tailwind.
An activist arrives.
Management changes course.
Assets are sold.
Capital is returned.
The market suddenly notices what had been sitting in plain sight all along.
Those few re-ratings generate pretty much all of the overall return.
The beauty of the others is that we don’t lose very much while we hold them.
Today’s business is classic portfolio fodder.
It has been operating for more than sixty years.
It carries virtually no financial risk.
And its net current assets exceed the entire market value of the business.
Let’s take a closer look…