Here is part of a memo I wrote in July 2002. If you want to learn more go to google and put in words Graham Net Current Asset Value Stocks
Benjamin Graham’s Net Current Asset Value Stocks (“NCAVS”)
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“It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone - after deducting all prior claims, and counting as zero the fixed and other assets - the result should be quite satisfactory."
- Benjamin Graham,
The Intelligent Investor, 1973
Selecting stocks that trade below Net Current Asset Value has historically outperformed the market averages by a wide margin. The following was taken from “What Has Worked in Investing” by Tweedy, Browne and Company :
“In an article in the November-December 1986 issue of Financial Analysts Journal, "Ben Graham's Net Current Asset Values: A Performance Update", Henry Oppenheimer, an Associate Professor of Finance at the State University of New York at Binghamton, examined the investment results of stocks selling at or below 66% of net current asset value during the l3-year period from December 31, 1970 through December 31, 1983.
The study assumed that all stocks meeting the investment criterion were purchased on December 31 of each year, and replaced on December 31 of the subsequent year by stocks meeting the same criterion on that date. To create the annual net current asset portfolios, Oppenheimer screened the entire Standard & Poor's Security Owners Guide. The entire 13-year study sample size was 645 net current asset selections from the New York Stock Exchange, the American Stock Exchange and the over-the-counter securities market. The minimum December 31 sample was 18 companies and the maximum December 31 sample was 89 companies.
The mean return from net current asset stocks for the 13-year period was 29.4% per year versus 11.5% per year for the NYSE-AMEX Index. One million dollars invested in the net current asset portfolio on December 31, 1970 would have increased to $25,497,300 by December 31, 1983. By comparison, $1,000,000 invested in the NYSE-AMEX Index would have increased to $3,729,600 on December 31, 1983.
The study also examined the investment results from the net current asset companies which operated at a loss (about one-third of the entire sample of firms) as compared to the investment results of the net current asset companies which operated profitably. The firms operating at a loss had slightly higher investment returns than the firms with positive earnings: 31.3% per year for the unprofitable companies versus 28.9% per year for the profitable companies.
Further research by Tweedy, Browne has indicated that companies satisfying the net current asset criterion have not only enjoyed superior common stock performance over time but also have often been priced at significant discounts to "real world" estimates of the specific value that stockholders would probably receive in an actual sale or liquidation of the entire corporation.
Net current asset value ascribes no value to a company's real estate and equipment, nor is any going concern value ascribed to prospective earning power from a company's sales base.” End
On August 7, 2002 our computer screen revealed 585 companies selling below Net Current Asset Value.
Of this total 152 companies (26% of total) had positive return on equity for the previous twelve months.
Of the total, 84 companies (14% of total) had equity to assets ratio of greater than 90%.
With an equity to asset ratio of greater than 90% these companies have little leverage at all.
Of the total, 123 companies (21% of total) had equity to assets ratio of greater than 80% and less than 90%.
In my opinion the NCAVS represent under-followed, out-of-favor and little known companies that have historically returned superior results. |
