Re. net-net, you could take current assets minus all liabilities, which is how I interpret Graham's definition of net current assets.
You then multiply this by your favorite ratio. Graham used a ratio of 2/3. If the stock is selling for less than the product, it's a candidate to consider buying in this scheme.
How to choose the ratio for the cutoff?
Ben Graham's Intelligent Investor book suggests using 2/3. If the stock sells below 2/3 of net current assets, it's a candidate for him. There's no particular justification that I could find in the book for choosing 2/3, as opposed to some other fraction. It's just there, in the book.
I don't think you have to use 2/3 as the gospel. You might want to choose a different ratio as your cutoff, for this reason: Typically the stocks that sell at the deepest discount to net current assets are very small market cap stocks, with low stock prices. A $1 stock with a market cap of $7 million for company selling a single product, well that would not be uncommon. If this isn't what you feel comfortable buying, you could loosen your screen by choosing a larger ratio than 2/3, and you could thereby find more stocks to choose, including better capitalized companies with bigger market caps.
Lately, though, there are lots more stocks selling below net current assets, or even below net cash, than in recent memory. |
