The Net-Net Method
The following excerpt is from Charles Brandes' book, "Value Investing Today". Graham was an acquaintance of Brandes.
Graham's most famous theory was that investors should buy stocks at prices of no more than two-thirds of the company's current assets (cash and equivalents on hand, including immediately salable inventory), minus all liabilities (including off-balance-sheet liabilities such as capital leases or unfunded pension liabilities). Nothing was paid for permanent assets such as property, plant and equipment, or intangible assets such as goodwill. Graham held that if a company traded at two-thirds of this ammount and was profitable, then investors needed no other yardstick.
"What about companies that qualified except for current losses?" I asked Graham. Those companies, he believed, were dangerously situated. Losses constantly burn up corporate assets and could incinerate the appropriate margin of safety.
Today, elevated valuations in the U.S. equity market make it nearly impossible to find a profitable compay selling at a one-third discount to the net-net current assets. However, using ...databases..,value investors can screen
for those companies with the lowest net-net asset ratios. |
