The biggest problem with a typical net-net is, I suspect, that the value is being eroded: value is falling, not rising.
The expectation of value destruction is the only rational reason a company should trade as a net-net.
So, the key goal is to try to filter those out as well as you can.
I would look first to something like a forward free cash flow yield estimate, if you could find it.
Or forward cash flow yield, or forward earnings yield, or current cash flow yield, or current earnings yield, whatever you could find.
A lot of these might be negative, but mildly negative is probably better than strongly negative, right?
I’d lean towards forward estimates if you can find them, since such firms often have high odds of material one-time things in any given reporting period.
But of course, hand filtering by looking too closely at MI picks is usually a bad idea–testing is better.
Remember Murphy’s law of quant investing: the stuff that looked worst probably generated the most returns in the backtest.
Having done business with a public net-net run by someone I knew, I can tell you why that one was a net-net.
Financial statements don’t tend to capture the hidden liability of management with (over) generous salaries and golden severance parachutes.
I knew the firm’s situation with some detail because of the work I was doing for them–managing their cash pile–but I didn’t buy any shares.
Even though the market value net asset value was a multiple of the stock price.
Jim