A classic net-net

This is the reason to hold Titon: The market has given up any prospect of recovery. The share price values its assets at 30% less than my guesstimate of their valuation in liquidation.

Disengaged investors could be right. If you look at the window handle manufacturer's record, competition was eroding Titon's profitability before two years of losses due to recession, and now a nascent recovery has faltered.

Faced with vertiginous charts like Titon's you really have to believe companies can pick themselves Rocky-like from the floor before the final body blows thunder down from their competitors and the bell tolls.

Let's say Titon recovers. The economy picks up, house building gathers momentum, the South Korean joint venture profits, or something unforeseeable and unexpected happens, its founder decides to sell up, say, and somebody wants the company. Then, we're in the money, as long as the Thrifty 30's still holding.

There's one big 'if': the meantime. Until then Titon must husband its resources instead of splurging on unprofitable investment or sustaining heavy losses. If it does, it will eat into the assets that make it look so cheap, most notably nearly ''3m in cash. In other words, the rot must have stopped in 2009.

I'll return to these issues when I finish the script. Meanwhile, here's a guesstimate of liquidation value. It's a guesstimate because it's based on values from a seventy year old textbook that I believe to be conservative, but have never seen tested in an actual liquidation. And it's a rough guesstimate because it ignores some of the costs of liquidation, like redundancy, for example.

The interesting thing about Titon's valuation is that the market price is not only a third less than the conventional net current asset calculation valuation invented by Benjamin Graham (current assets less all liabilities) it's also nearly a third less than its liquidation value (taking into account all tangible assets, but discounting them to arrive at a more realistic price, bearing in mind the company would be a forced seller).

The conceit of the net current asset value calculation is that although net current assets are unlikely to be worth balance sheet value when they're liquidated, a company will probably have sufficient fixed assets, ignored in the calculation, to make up the difference even though they're likely to be worth much less in a liquidation than book value.

These days, that may not be true. For example, companies often prefer to lease premises, which are assets and liabilities not recorded in balance sheets and therefore not factored into the ratios. Bring them back onto the balance sheet and they can annihilate the valuation (which is one of the reasons I must question French Connection's status as a net current asset value bargain).

Titon owns property, though, which I've valued at 50% of book value, so maybe it's the kind of company Graham was looking at all those years ago.