Net-Net Stock I'm Buying Right Now!

I remember back when I lived in the city, I lived in a particularly bad neighborhood with lots of theft and vandalism. One evening, as I'm resting in my P.J.s after a long day of work, a friend of my room-mate comes walking through the door and says, “Hey, Dude, your trucks on fire.”

Needless to say I SPRINTED down the many flights of stairs to find that my truck was, indeed, engulfed in flames. It was bad enough that I had just lost a vehicle, but the primary concern was that the flames were about to reach the gas tank and, mind you, this was a populous area with lots of other vehicles around and kids playing etc. So I called the fire department, but when they arrived they initially missed the driveway that led to the complex I lived in. So I take off SPRINTING…AGAIN…down the street chasing after the fire truck, holding up my P.J.s with one hand and waving maniacally with the other, yelling, “Over here! Over here! My trucks on fire!”

Sometimes when investing, you over estimate your own intelligence and find one of your positions blowing up in your face and next thing you know you're running down the street, holding up your P.J.s, chasing after the fire truck, hoping to God they put the fire out before it hits the gas tank. Have I properly illustrated the point? 😂 😂 😂

This is especially accurate when investing in cheap, illiquid garbage. Fortunately there's a wonderful concept in investing called diversifying that severely limits over all portfolio decline when one of your stocks blows up. I don't know what the right number of stocks to own is, nobody does. ( Although I strongly suspect that the answer is never just two or three ) But I think it goes without saying that the worse the quality of the business and the less research you do on any individual name, the more you need to spread your bets. Now that you've been properly warned, I will get to sharing some of the stocks that I own, that I think are good buys as part of a diversified basket. Of course, this is not investment advice, do your own due diligence. I'm just throwing out some names, do with that what you will.

The name we’re going to look at today is Surge Components $SPRS and we're starting there because it's one of the less sketchy names that I own, but also one of the cheapest.

As always we’re going straight to the balance sheet and that's going to be 90% of the focus. It's pretty straightforward. USD thousands. Per 2/28/25

Firstly ( and most important )

CASH/SHORT TERM INVESTMENTS 12,651

ACCOUNTS RECEIVABLE 5,442

INVENTORIES ( We will mostly ignore this ) 5,261

Total Current Assets Listed = 23,354

If we strip out the inventory to be conservative we get 18,093

Next we go to the liabilities section. We will not break them down, we assume they will ALL be paid in full. So the only pertinent number is listed under

TOTAL LIABILITIES 5,360

We want to get to Net Current Asset Value so we take the total relevant current assets listed above ( Again, I mainly like cash and accounts receivables, but we can add in the inventory value depending on how conservative we’re being ) and subtract the total liabilities from it. To get a number representing what it would look like if SPRS closed up shop today and liquidated.

23,354 - 5,360 = 17,994

That's nearly 18 million of very liquid assets against a market cap of 12.7 million.

But maybe the inventory is worthless? It seems doubtful, given that it's non perishables, but let's just assume that SPRS closes shop today and we get nothing for inventory. What does that look like?

If we remember from above just cash/short term investments/accounts receivables equaled 18,093 so subtracting total liabilities again we have

18,093-5,360 and we still get 12,733 against our 12.7 million market cap. So even without inventories we’re essentially getting a free business at this point. Seems like a good deal right? Surely since the markets giving it away it has to be absolutely bleeding cash or something right? Well let's take a look at the cash flow statements.

Free cash flow has averaged about 2 million dollars a year for five years straight. Has there been some negative quarters? Sure. But, on average, they're absolutely fine.

How much is 2 million dollars a year of free cash flow worth to you? Cause it surely has to be worth more than NOTHING.

Maybe they're heavily diluting and shrinking shareholders equity over time? Wrong again. In fact, total shareholder’s equity has nearly doubled in the past five years from 10,601 to 19,489!

Revenue has shrunk a little bit over the years, but in 2024 we still had over 30 million in sales, compared to our 5 year average of 40 million revenue.

All the normal arguments will be stated, of course, that it's a dying business or shrinking ice cube or whatever and that may be, but I'm just not seeing it. Consistent FCF, growing equity, growing cashpile, shrinking liabilities…it seems just fine to me, but it's still free. Less than free actually. Maybe I'm misunderstanding something or did my math wrong or something is hidden from me. Any of the above is possible, but that's why we buy several of these, so we can avoid a huge downturn if one such stock blows up.

I have a stake at $2.38 per share and, quite frankly after reviewing the numbers I'm tempted to buy more. It's just so darn cheap!

Last thing we’ll talk about is the float. Which is shockingly relevant for illiquid companies especially, but very infrequently talked about in the value space. This is a nano cap stock with a current share price of $2.21 so we're already going to get a nice small float, but there's heavy insider ownership as well, so the free float market cap is 6.53 million, divide that by $2.21 share price and we get a free float of 2.95 million. Now I'm not going to get into the details of why this is so interesting, but for now all you need to know is the smaller the free float, generally the bigger the stock price move. And when a stock is super cheap, and thus, likely to price correct at some point, that could be a very good thing.

That's really all I've got for now, I would talk about what the business does and who runs it, but I don't really care and it's not that relevant 😂😂

After this I'm going to slow down the pace a little bit, but I plan to release a new piece every few weeks or so, often detailing why I'm buying a stock, or maybe detailing portfolio strategy or maybe…if we're lucky, looking at some charts. Value people love that. Until that day…happy dumpster diving!