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Benjamin Graham's Net Current Asset Value Bargain Screener

November 24, 2008 | About:

As market plummeted to the lowest valuation levels in decades, value investors now have the luxury to buy “net current asset bargains” described in value investing bible “ The Intelligent Investor”.

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-cirrent-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.

They were not around much for modern value investors. But the recent drastic decline of the stock market has created these opportunities. In response of this, GuruFocus has created Graham Bargain Screener for value investors to get into these opportunities.

Ben Graham loved these types of situations, defining the net-net value as:

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.

The risk in investing these companies is that most of them are not well run, and may be losing money continuously. To reduce the risk, we also require these companies have postive operating cash flow, in this way, the companies will probably be able to maintain their operations without burning its cash. We also requires the companies not have meaningful debt.

With this in mind, GuruFocus has created a Graham Net Current Asset Value screener to filter out the companies that meets the net-net value criteria. The rules are:

The stock prices are less than the net current asset value of the companies – Benjamin Graham

During the past 12 months, the companies generated postive operating cashflow.

The company has not meaning debt compared its cash position.

According to Benjamin Graham, some of these companies may well become insolvent as economic conditions get worse, it is important to hold a diversified group of them.

The is the link for Graham NCAV Bargain Screener.

Example: PRLS - Peerless Systems Corp. ($1.92)

Here we like to discuss a company which comes out our list, Peerless Systems Corp (PRLS). Peerless Systems Corporation is a provider of software-based embedded imaging and networking systems to original equipment manufacturers of digital document products.

The company is in technology sector, which most of value investors would avoid. However, if you look at the balance sheet and the market cap of the company, what the company does becomes irrelevant. The company’s balance sheet is extremely simple. It has $55 million cash, no meaningful PPE, no inventory, more importantly, no debt besides $7.8 million of account payable. Therefore, the company’s equity is $44 million, which is mostly cash. On Nov. 21, the company shares closed at $1.92, which 18 million shares outstanding, the company has a market cap of $35 million, which is less than 80% of the net cash available in the company balance sheet as of July, 31, 2008 .

Balance Sheet

July 31, 2008

Cash and Equiv

55.13

Short Term Inv.

--

Accts Rec.

1.04

Inventory

--

Other Current Assets

0.71

Total Current Assets

56.90

Net PPE

1.04

Intangibles

--

Other Long-Term Assets

0.20

Total Assets

57.17

Account Payable

7.81

Current Portion of Long-Term Debt

--

Other Current Liab.

1.44

Total Current Liabilities

9.26

Long-Term Debt

--

Other Long-Term Liab.

3.66

Total Liabilities

12.93

Total Equity

44.24




What is the risk for PRLS to run out of cash? While, during the last 12 months, the company had about $6 million of operating cash flow. Therefore, it is more likely for the company to increase their cash positions over the coming quarters than to deplete it.

This is a real dollar bill for 80 cents, no assumptions for future earning, no discount cash flow. Do you want it now?

As pointed by Ben Graham, it is important to buy a basket of net current asset bargains for this investing strategy. We have scanned our database, and found moer than 40 companies that are traded at a discount of net current asset value, and have postive operating cash flow. The screener is called Graham NCAV Bargain Screener.

This feature is for Premium Members only. If you are not a Premium Member, you are invited for a 7-day Free Trial.


Rating: 2.7/5 (92 votes)

Comments

harison
Harison - 5 years ago
How are they going to generate cash if they have no accounts receivable, inventory, or PP&E? They will almost certainly begin burning it in the coming quarters.
gurufocus
Gurufocus premium member - 5 years ago
In the case of PRLS, they are a small software company. As you can imagine, they don't have inventory, and have minimum PPE. They did generate more cash than they spend during the past 12 months.

Some of these companies are sold at 20-30% of net cash values.
sabonis
Sabonis premium member - 5 years ago
maybe I am missing something but I have never really understood the inventory portion of the graham equation.

How do you value it? Do you value it by what you bought it for? I know in my business that what I bought the inventory for is not necessarily what it is worth. I think thats especially true for other industries like restaurants, clothing stores, or anything else dealing with perishable items or things that become obsolete.

Anyone want to explain it to me?
cashmcnash
Cashmcnash - 5 years ago
Inventory is valued for accounting purposes at the lower of cost or market value. This is to take a conservative approach to asset valuation.

So theorthetically, on July 31st, the company's inventory was worth at least what what was reported on the Balance Sheet if not more. Unfortunately, as investors we rely largely on the company's intergrity and on their auditors to tell us whether or not the asset values being reported are reasonable.
buffetteer17
Buffetteer17 premium member - 5 years ago
Cryptologic CRYP, price currently $2.10.

(figures in $M)

shares 11

cash 40.0 x 1 = 40

acct. recv 10.7 x 0.75 = 8.0

other current assets 20.0 x 0.75 = 15.0

long term assets 24.6 x 0.0 = 0.0

total liabilities -43 x 1.0 = -43

net 20.0

net per share $1.82

graham_jeffy
Graham_jeffy - 5 years ago
What are the top three stocks with the largest margins between net current assets and price?
SCthought
SCthought - 5 years ago
If you read some Buffett Ltd Partnership letters he writes down inventory and receivables to around 80% of the value if I remember correctly.
ValueAddict
ValueAddict - 5 years ago
Re Peerless Systems:

I have a couple of concerns over the risks involved here. A quick glance at the 10K last year reveals that a number of its revenue sources will not continue in the future.

Adobe will not likely renenew its contract. The remainder of the business will be CONCENTRATED among FEW customers.

It also sold off its patents and processes for a revenue producing unit to a third-pary (along with 38 of its employees). It stated that it wanted to get into a new line of business and that its old history is NOT relevant to the current business model.

If you take a look at the executive compensation section it states that one of the many goals of execs is to find attractive targets (basically to start this new business with the cash on the balance sheet).

So your rolling your dice here on whether management can make an accretive acquisition. And the cash does not belong to the shareholder. Who wants to make a probabilitistic estimate whether this new company makes money or loses money?
ValueAddict
ValueAddict - 5 years ago
SCthought Wrote:

-------------------------------------------------------

> If you read some Buffett Ltd Partnership letters

> he writes down inventory and receivables to around

> 80% of the value if I remember correctly.

I have copies of them somewhere but am too lazy to look. Appying a 75% discount just makes the assumption more conservative. In reality it just depends on the company.

Its meant to approximate liquidation value if inventory had to be sold quickly.


flynster
Flynster premium member - 5 years ago
ValueAddict - I've read Buffet's Berkshire shareholder letters and am very interested in reading Buffett Ltd Partnership letters. Do you know where I could find them or would you mind sending them to me?
gurufocus
Gurufocus premium member - 5 years ago
GuruFocus complied Buffett's partnership letters before, and they are collected at Buffett profile page under "Timeless readings".
ValueAddict
ValueAddict - 5 years ago
flynster Wrote:

-------------------------------------------------------

> ValueAddict - I've read Buffet's Berkshire

> shareholder letters and am very interested in

> reading Buffett Ltd Partnership letters. Do you

> know where I could find them or would you mind

> sending them to me?

Yeah. I think I have few more than Gurufocus has collected in PDF format. I am actually traveling for a bit and will be back late next week. Let me set-up a dummy e-mail account on gmail (I hate posting personal info on the web).

Contact me at:

ValueAddict83@gmail.com

Will be in touch next week.
al
Al - 5 years ago
how do i delete a portfolio?
avishek
Avishek - 5 years ago
NCAV or DCF....Liquidating value or economic moat....Buffett or graham (only on valuation).I don't know which method to follow since I am investing just a few thousand dollars.

Any suggestions.

www.growingrich.net
Www.growingrich.net - 4 years ago
I think the net current asset value screener is a great idea, I´ve been looking for these kind of inefficiencies in the market and there are quite a lot.

There are also some companies that although not selling below their net current asset value are in very good discount.

www.growingrich.net

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