Graham And Dodd’s Margin Of Safety Comes Through

A funny thing happened to the stock of StorageNetworks yesterday when it announced plans to liquidate.

It went up.

Faced with a business model that wasn’t working, uncertain alternatives, and potential acquirers who weren’t willing to pay what the company was worth on paper, StorageNetworks chose instead to liquidate.

And a 69-year-old notion of stock valuation came through for investors smart enough to recognize the opportunity.

Benjamin Graham and David Dodd, mentors to Warren Buffett, first wrote of the importance of book value in their 1934 classic Security Analysis. Buying a stock worth less than its liquidation value gives investors an extra margin of safety, as StorageNetworks investors found out this week.

Of course, to be a truly great investment, a company also has to generate enough free cash flow to sustain its business. In their wisdom, StorageNetworks’ management realized they didn’t have that, so rather than run the company into the ground, they returned the remaining value to shareholders.

STOR stock trades at 0.79 times tangible book value. A quick search on Multex Investor shows 1,450 stocks trading for less than 1 times book, but it’s not clear how many of those trade for less than 1 times tangible book value, or the liquidation value of a company.

Of course, not every company whose business is terminal will act in the interest of shareholders, but tangible book value is still a good thing to keep in mind after all these years.

The broader market fell Friday on a disappointing unemployment report, as economic reports failed to excite investors for the second straight day.

The Nasdaq fell 19 to 1715, the S&P 500 lost 10 to 980, and the Dow dropped 79 to 9153. Volume declined to 1.35 billion shares on the NYSE, and 1.5 billion on the Nasdaq. Decliners led 23-9 on the NYSE, and 20-10 on the Nasdaq. Downside volume was 73% on the NYSE, and 59% on the Nasdaq. New highs-new lows were 77-81 on the NYSE, and 141-7 on the Nasdaq.

Roxio fell 10% on a warning, and Adobe slipped after guiding lower.

Wave Systems soared for a second day on a pact with Intel .

Research in Motion soared 13% on rumors it could be acquired by HP .

Wireless Facilities surged 12% on an upgrade.

Red Hat bolted 9% ahead of next week’s LinuxWorld show.

VeriSign , off 3%, could be liable for the theft of the domain name.

And the inevitable resignations began over the terrorist futures Web site.

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