My Empire of Dirt
Two Ideas: 1) A low risk net-net trading for 2x EV/EBIT. 2) A $10MM market cap business that generates $75MM of EBITDA... but it's complicated.
Today I’m going to talk about two ideas on opposite ends of the risk spectrum.
My favorite net-net. It’s a boring old cash rich business that has earned an operating profit for 20 consecutive years. Shares trade at 2x EV/EBIT.
A $10MM market cap business earning $75MM of EBITDA. Not a typo. Upcoming catalyst could unlock value in the business… or kill it.
My Favorite Net-Net
My favorite net-net trades at 2x EV/EBIT and has booked profits for 20 consecutive years.
Net-nets are one of the most tried and true forms of investing. Ben Graham, Warren Buffett and Joel Greenblatt all outperformed the market owning them. There is no standardized process in investing that is as time-tested and as logically sound as owning net-nets.
With that being said, I rarely find myself buying them. Mainly because I don’t like owning money losing businesses. Most net-nets I see nowadays are either inventory heavy or cash burning biotech companies. They’re not serious businesses. They trade beneath liquidation value, and generally for good reason. Either liquidation value is overstated, or future cash burn will ensure that liquidation value works its way lower and lower in time.
My rules for net-net ownership are simple:
Consistently profitable business
Honest management
Low multiple on earnings
Massive cash buffer
Low/no debt
95% of net-nets won’t meet the above criteria. When I find one that does meet my rules, I simply add it to the portfolio. Today’s stock meets each of the above criteria. The business has booked an operating profit for 20 consecutive years and looks poised to continue earning profits well into the future. This company trades at only 2x EBIT, net of cash. Cash/securities are in excess of all liabilities. Debt is virtually zero.