Monday, November 17, 2008

Ben Graham Net Net Deep Value Stocks

In 1932 at the bottom of the Great Crash, Ben Graham's fund had dropped 70%, but it was precisely this time when he wrote an article on Forbes about the cheapness of the market and how the market was selling the United States for free.

Deep Value Companies

Stock Market Prognosticator previously shared a list of Net Current Asset Value plays, and I previously wrote about how there were literally hundreds of companies that are being quoted for less than their cash in the piggy bank. One such company that I have analyzed lately is ValueVision Media Inc. These companies are being quoted in the market for much less than their liquidating value, as if they were all destined to be doomed. But does it make sense to be quoted for less than the cash in your hand?

A president of the New York Stock Exchanges testified
"In times like these, frightened people give the United States of ours away."

Liquidating Value

Graham defined liquidating value very conservatively.

Working capital (current assets less current liabilities) then subtract any debt not included in current liabilities.

But we can be just as conservative yet at the same time find logic in a slight variant of the above formula. The Net Net Working Capital.

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities

The formula states that;
  • cash and short term investments are worth 100% of its value
  • accounts receivables should be taken at 75% of its stated value because some might not be collectible
  • take 50% off inventories, due to discounting if close outs occur

The Table of Steals

Until recently, it was quite difficult to find a Net Net stock that had real prospects, but the market is washing them up ashore more and more frequently. The tide has finally gone out and here's a few that came up.

Price % to NNWC
VVTV 15.03%
ASFI 16.18%
NUHC 18.14%
SPF 24.57%
PLI 26.28%
TAIT 26.42%
CRV 29.96%
BZH 34.79%
TBAC 35.14%
TWMC 35.92%
MSN 36.64%
TUES 41.20%
NENG 42.12%
HDNG 44.40%

To run the screen yourself, go here. The top 7 are already trading at a huge 66% margin of safety.

However, these types of asset plays are not suited to everybody. There is a lot of volatility involved and the value may never be realized.

As always, due diligence is required and ever more in these situations.

Disclosure: No positions in any stocks mentioned at the time of writing.

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