Finding companies trading at discounts to their net current assets is not as easy as it was last year. However, such companies do exist. For example, Abatix Corp (ABIX), distributor of safety equipment and tools, trades for $10 million despite net current assets of $15 million. Furthermore, the company is profitable, having earned $400K and $500K in the first 3 months and first 6 months of this year, respectively.
What's unfortunate, however, is that management does not communicate with shareholders - at all. When the company publishes its quarterly financial statements, it offers no discussion, no outlook and no conference call. Basically, shareholders have no way of knowing what's on management's mind. Under these circumstances, it's hard to believe anyone can understand this business enough to warrant a purchase.
For example, while the company's sales are up year-over-year, the company's inventory and receivable balances are up a disproportionate amount. This could occur for many reasons, including any combination of the following:
- the company sees an opportunity for expansion
- the company is offering more favourable terms to encourage customer purchases
- sales were lower than anticipated
- some customers are in financial trouble
- simple timing issues related to quarter-end dates
But since management doesn't offer any colour on the above issue (or any other), shareholders are left to make guesses as to the challenges currently facing the company. Unfortunately, a guessing shareholder is not one who is likely to be able to protect his downside risk with any certainty.
The company is able to legally get away with avoiding disclosures of this nature because it de-listed from the Nasdaq in 2007, and thus is not bound by its previous reporting requirements. It now trades on the pink sheets, which contain companies of varying quality. Investors are warned to avoid such companies unless they fully understand the risks. Investor protections for exchange-listed companies are there for a reason!