Deep value stocks continued their ride higher during October, solidly beating both the S&P 500 and Nasdaq. Three stocks were bought and two were sold, which resulted in an updated model portfolio of 15 stocks, with a stock price trading below their respective NCAV value (Net Current Asset Value).

The NCAV formula is very straight-forward – simply record the latest available current asset value on the balance sheet for a given company and subtract all liabilities. Then take this value, divide it by the latest fully diluted share count and compare it to the stock price.

If the NCAV value is larger than the stock price, it means that if all current assets were liquidated and all debts paid, then the shareholder could collect a positive amount of money after equity investment. Although, one major adjustment I make is to not include preferred stock as a liability.

Source: Author analysis

NCAV is a widely used estimate for liquidation value and I use it to screen for deep value stocks. There are some landmines a happy NCAV investor can step on, including but not limited to:

  1. Chinese stocks (not double listed in Hong Kong or Shanghai).
  2. Biotech stocks.
  3. Financials.
  4. Companies engaged in fraud.
  5. Cash burn companies.
  6. Companies engaged in serial dilution.

For more information around my screening methodology, please refer to my first article in this series.

Looking at the action during October, both Insignia Systems (NASDAQ:ISIG) and NCS Multistage Holdings (NASDAQ:NCSM) were sold. Both of these stocks can bounce around their NCAV values month-to-month, which makes them trading candidates.

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Source: Author analysis.

In general, I have noticed that these micro-cap names, that my screen produces, tend to have high volatility. One stock that the model portfolio bought this month was TAT Technologies (NASDAQ:TATT). Which was an extreme out-performer during September, but has now come back down to earth.

Source: Author analysis.

Current Portfolio

Finding good deep value stocks is harder than it sounds. In my Morningstar database, I have access to fundamental financial information on a quarterly basis for broadly 5,400 stocks. However, of these only 62 stocks passed the NCAV filter and after excluding Biotech, Chinese and the other sub-filters mentioned earlier, the Net-Net universe (a term used for deep value stocks) was only 15 stocks.

Source: Morningstar; Author analysis.

Source: Author analysis.

Equity Commonwealth

The most exciting addition to this month’s model portfolio is an office REIT named Equity Commonwealth (NYSE:EQC). This REIT is a very special Net-Net, for a couple of reasons.

For one thing it is a high-quality company with the legendary Chairman Sam Zell. This is pretty amazing, since many stocks I review and filter out that are trading as Net-Nets are of very low quality.

The second thing is that the stock is not a Net-Net due to the Coronavirus impact on the office real estate market. The stock is a Net-Net because company management has been selling off assets over several years and currently only have four properties in its portfolio.

Source: Company Q2 presentation.

The cash balance was $3.4 billion as at end of Q2 2020, however there was one special dividend ($3.4 per share) paid recently, which decreased this pile by c. $425 million. So, if we adjust the NCAV value with this dividend payment, then the stock is currently trading slightly above NCAV.

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The current four properties are located in Denver (Colorado), Austin (Texas) (two properties) and Washington (District of Columbia). Sporting a 90% lease ratio.

During the Q2 analyst call, Management did not give a clear view of how a possible timeline for ramping up acquisition of distressed office space would look like, but they are having active discussion.

So put together, although the stock on an adjusted basis is not strictly a Net-Net, the superb management of this company coupled with its cash pile and the opportunities in the distressed office space market for savvy buyers, entices me enough to have a speculative position in this stock.


Please note that Small-cap stock and Micro-caps in particular are less liquid than Large-cap stocks. Hence, it can take time to build a position in any given name in the model portfolio list and the stock can be of no interest to institutional buyers.

There is also a higher fraud risk and default risk with such small companies, that an investor will not find with the majority of companies included for example in the S&P 500.

Hence, any investor seeking exposure in this space should carry out proper due diligence.

Disclosure: I am/we are long EQC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I’m also Long all other stocks listed on the model portfolio list.