Titon – A Classic Ben Graham Net-Net

If you run a net-net screen of some kind it’s likely that you’ll have come across this (very) small cap stock.  Titon Holdings is a Ben Graham net-net in almost every way.

It’s a manufacturer, it has property, plant, fittings and fixtures and equipment to bolster his beloved tangible asset value.  It also has virtually no debt and a large cash safety cushion in the bank.

It currently has a net-net ratio of about 0.66.  For the mathematically gymnastic, this means that it’s trading at around 2/3rds of its net-net value which was the maximum value that Graham would typically pay.

The company is also cheap enough to make it onto my modernised version of Graham’s strategy.  You can read the original modern net-net strategy article here.

 

The price may be low, but is it good value?

Titon’s fortunes are tied to the housing market in many ways and since the end of the housing bubble in 2007 they have barely made a penny in profit.  What they haven’t done though is lose a ton of money either.

Add to that the fact that they have net cash of around £2.8m and an interest INCOME of about £35,000 (fuelled by the £2.8m cash balance).  It seems that there’s little chance of the banks stepping in to take over.

So if bankers aren’t the main worry, what about short term creditors.

They’re unlikely to be a problem either.  The quick ratio is very healthy at more than 2 and the current ratio is over 3.  In fact there’s more cash in the bank than there are short term liabilities and there are effectively no long term liabilities.

As the final icing on the cake there’s a 5% dividend which, if sustainable, will be a possible driver of capital gains, especially if the dividend ever gets back to the 4p or 6p of the past (which would be rather attractive given today’s share price of 35p).

 

A Problem with micro-caps

Titon is both tiny and has a relatively illiquid stock.  The bid/ask today is 34p/37p, which means that if you buy at 37p you have to make a 9% gain to break even (since your shares immediately become worth only 34p).

You can get around this to some extent with long holding periods (I use 5 years as the default) which gives each stock plenty of time to generate as much return as possible, thereby overcoming the drag of a large spread.

 

The 21st century net-net model portfolio

Titon is now in the 21CNN model portfolio (which had a £50,000 starting value on Jan 1st 2012) at 37p with a weighting of 1.7% and it sits alongside other great companies including AGA and Home Retail.  At some point I’ll start posting the performance chart but since it’s currently more than 90% cash there’s not much going on.

You can see in the table below the current top 10 from my small/value/unlevered screen, along with their other key ratios.

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Comments

  1. says

    John,

    Great post, I’m a fellow holder in Titon as well. Did you end up buying shares with a market order? When I first acquired my shares I used a limit order at the midpoint between the bid and ask and it filled in an hour or so. I’m thinking of picking up a few more shares, so we’ll see how that goes. I’ve done a lot of limit orders at the bid or slightly above and usually my orders get filled pretty quickly, eliminating the spread like this can save a lot for an investor.

    I think the dividend is sustainable in the sense that the company seems to be committed to paying it even if the payment comes out of cash.

    Best of luck, at these levels we have a lot to be hopeful for!

    Nate

    • says

      Hi Nate. For some reason your site wasn’t on my RSS list, so I’ve rectified that for a start.

      As for Titon, I don’t actually own any shares (although I have done in the past and made some profit with it). The portfolio I talk about in the post is a model portfolio for proof of concept for the mechanical system that runs it. If it performs well for a couple of years I’ll start dripping some of my funds into net-nets using this system.

      For now I’m 100% in more ‘Buffett’ style stocks, i.e. big profitable growing companies.

      Good luck with Titon and let me know when you get out!

    • says

      Interesting tactic Nate, I’ve tried it in the past and ended up not getting the shares. Maybe I should have another go next time I invest in a company with a big spread.

  2. says

    I used the midpoint limit today and got a fill, of course a few hours later the shares dropped like a rock so maybe I was taken advantage of?

    I’m not sure about the UK, but in the US often people will enter “good till cancelled” limit orders at a hopeful price. So a stock will be trading at $5 and someone wants $7 so they’ll put in a limit at $7 that hangs around for six months. When looking at the quote the $7 will show as the ask, but only a fool would actually pay that. Often a market maker will take a much smaller spread, that’s why I’ll do a limit almost right at the bid. If the spread is tighter the midpoint usually works well.

    John, thanks for signing up to RSS. I don’t do RSS as much anymore, so I have a list of bookmarks I try to hit a few times each week of favorite blogs. You’re in there..:)

    Nate