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In The Intelligent Investor, Benjamin Graham discussed the methods he used in his investment firm Graham_Newman. One is them is what he called Net-Current-Asset (Or “Bargain”) issues. He wrote:
The idea here was to acquire as many issues as possible at a cost for each of less than their book value in terms of net-current-assets alone – i.e., giving no value to the plant account and other assets. Our purchases were made typically at two-thirds or less of such stripped-down asset value. In most years we carried a wide diversification here – at least 100 different issues.
Graham’s “net current asset value” approach, apparently works very well. One research study, covering the years 1970 through 1983 showed that portfolios picked at the beginning of each year, and held for one year, returned 29.4 percent, on average, over the 13-year period, compared to 11.5 percent for the S&P 500 Index. Other studies of Graham’s strategy produced similar results.
Ben Graham loved these types of situations, defining the Net Current Asset Value (NCAV) or Liquation value as:
Net Current Asset Value (NCAV) = Current Assets - total liabilitiesand Net Cash as
Net Cash = Cash and short-term investments - total liabilities
Ben Graham loved these types of situations, defining the net-net working capital (NNWC) value as:
Net-Net Working Capital (NNWC) = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities
Graham looked for companies whose market values were less than two-thirds of that net-net value.
With this in mind, GuruFocus has created a Graham Net-Net Working Capital screener to filter out the companies that meets the net-net value criteria. The rules are:
The performance of the stocks can be seen in user portfolios, described in this article