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From 1923 to 1957 Warren Buffett's mentor, Ben Graham, followed a strategy of investing in net-nets, because as he said: “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...net current assets alone…the results should be quite satisfactory. They were so in our experience, for more than 30 years.” |
In The Intelligent Investor, Benjamin Graham discussed the methods he used in his investment firm Graham Newman. This is what he called Net-Current-Asset (Or “Bargain”) issues.
On page 381 of the updated version of "The Intelligent Investor" Benjamin Graham discusses the Net-Current-Asset (or "Bargain") valuation method. The idea was to acquire shares in companies at a cost for each that was less than their book value in terms of net current assets alone, while giving no value to the plant property or other assets.
As described in the subscript on page 391 of the "Intelligent Investor" Graham's Net Current Asset valuation means taking only the current assets and subtracting the total liabilities. These are the type of bargains this report will cover in depth. 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. Through this monthly report, GuruFocus will highlight the top 5 bargains using the net current asset valuation method.
Ben Graham's net-net strategy worked well for him. Modern value investors rarely have had the opportunities to invest in these “bargains”, until Mr. Market presented these opportunties to value investors in the recent crashes. GuruFocus developed a “Graham Net Current Asset Value Screener”, to find these companies. Portfolio built based on Nov. 24, 2008 gained more than 50% in five months, even the market was slightly down.
Throughout the year, GuruFocus will issue research report on five of the top Net Current Asset (NCA) Bargains each month to readers. If you are a Premium Member ($349/year) you can access this report free.
June: This month's pick is an electronics manufacturer that is cash rich following an acquisition. Management is attempting to turn around their operations, which if successful will reward investors.|
May: This month's pick is simply too cheap, it's trading for less than net cash. Their operations are profitable and cash flow generative.
April: This month's pick is earned a 19% ROE, trades at 3x earnings and 78% of NCAV. They are a construction company headquartered in Portugal.
March: This month's pick is company specializing in telecommunications consulting and project management. They maintain an enviable market niche, and are recovering from the loss of a key customer.
February: This month's pick is a fabric importer whose German subsidiary has a market leading position. They sell at 82% of NCAV and 70% of book value. The company is profitable and has attracted the attention of two savvy investors.
January: This month's pick is selling for 54% of NCAV in a tough industry. They have changed their strategy direction hoping for an eventual turnaround. This month's issue also contains an update on the net-net portfolio including a summary of all the companies in the "hold" category.
November: This month's pick has been undervalued for seemingly forever, but with a 1% dividend yield, and 9% book value growth patient investors haven't suffered while waiting. Executive and capital structure changes might signal that value realization isn't far off.
October: Selling at 65% of book value, and 5 times earnings, this is a cheap company worth consideration. It would be hard to identify the products that October's pick fabricates; yet they play an important role within the industry that they're active in. This company is conservatively run, and more importantly didn't experience a loss during the financial crisis, or after.
September: This net-net has a history of strong profitability, asset safety, and potentially undervalued real estate.
August:This month's net-net is in the midst of a multi-year turnaround, if management's plans are successful this company could soar.
July: July's pick's legacy business is letting contracts expire and their business runoff. Management is an activist deep value investor and has used the company in the past as a platform for activism. The company currently has a small holding in another near net-net.
June: June's pick was first profiled two years ago. Recent events have made the company much more attractive, especially after the company engaged an investment bank to explore a sale, or asset divesture.
May: May's picks are two companies in the aviation industry. One sold a division for more then their market cap while retaining two profitable divisions. The second owns 30% of the first and has earnings obscured by a one time charge.
April: April’s pick is a technology company in the medical device industry that has weathered many storms and remained profitable. The thesis is simple, 80% of the market cap is cash, and an EV/EBIT of 0.82. Earnings and book value have been growing, a hidden gem for sure.
March: March's pick was hit by an industry wide downturn and is trading as if it has no hope. Yet despite pricing pressure the company has found ways to generate cash flow. Management is focused on returning cash to shareholders and is open to liquidating portions of the business.
Feb: February's pick might have an unattractive business, but their assets are too cheap to ignore. Management has shown a willingness to return cash to shareholders, though buybacks and dividends. The company is slowly liquidating themselves.
Jan. 2013: January's pick is a company with a strong brand franchise and a product launch that could provide a much-needed boost to earnings. The company trades at a 17% discount to NCAV, and at has a negative enterprise value. The company trades at 5x average earnings over the past four years.
December: This pick is a critical player in the HDD industry. The company is based out of England but trades on the NASDAQ as an ADR. The market has ignored the company, but two value funds have spotted it and accumulated a 25.5% stake. With a P/E of 6.2x and a P/B of .68x it's not hard to see the value. At a minimum this company is worth NCAV, which is 11% higher than the last trade.
November: The pick for November has a market cap closing in on $1 billion dollars, with sales in excess of $2 billion dollars. The company's profits are consistent. The company plays a vital role in the electronics manufacturing industry.
October: October's pick is undervalued on almost any possible metric. The company is a US distributor of electronic and audio components with a thriving operation in Asia. The company is conservatively financed, throws off significant free cash flow, and trades for a meaningful discount to NCAV and book value. The CEO and founder have run the company since 1981.
September: Imagine a company that distributes products through the biggest retailers in the world, such as Wal-Mart, Kohls, Sears and others, yet has no brand recognition amongst the millions of shoppers who view the products every day. The company is September's pick a private label supplier for all of the companies mentioned above, and more. With coveted distribution partners the question remains, why does this company trade for 46% of book value, and slightly below NCAV?
August: August's pick is a bank with a checkered past that was heavily involved in subprime lending. The bank was required to wind down all subprime products and is in the process of liquidating. The bank has sold their loan portfolio and deposits to a Pennsylvania bank, which is pending approval. The bank is selling for 56% of adjusted book value. Upon sale completion book value will be mostly liquid cash.
July: July's pick is a company trading below 2/3 NCAV with a potential catalyst for full book value, which is 2.5x more than the current price to be realized. The company has been consistently profitable and operates in a stable industry. Cash makes up 70% of the company's market capitalization.
June: This true Ben Graham net-net - selling for 2/3 of NCAV - is a 48 year old company with 80% market share in its core business. It trades at 50% of book value. And book value understates replacement cost.
May.May's Ben Graham Net-Net pick has been profitable for 19 straight years. It has 25% of its market cap in cash. And zero debt. Insiders own 48% of the company.
April: it has been profitable for 17 straight years. It paid special dividends in 2006, 2008, and 2010 that together total more than 150% of today's stock price. Net cash equals 43% of the stock price. And 21% of the company's shares are in the hands of a modern day Ben Graham style fund manager.
March: March's pick has shown profits in 9 of the last 10 years. Its highest quality assets – cash, receivables, inventory, land, and buildings – minus all liabilities cover the stock's price 2 to 1. That's a 50% margin of safety. And 100% upside.
February: February's Ben Graham Net-Net Newsletter pick trades for just 0.84 times tangible book value. It has been profitable for 10 straight years. And 40% of the stock's price is sitting in cash.
Jan. 2012: January's Ben Graham Net-Net Newsletter pick trades for just 0.77 times net cash. And the company's largest shareholder is a billionaire investment guru.
Dec. December's pick trades for just 0.61 times tangible book value and 0.79 times net current assets. The company has been profitable for 25 straight years.
Nov.: November's pick trades for just 0.70 times tangible book value and 0.76 times net current assets. It also has 103% of its market cap in cash. That's right. This profitable company has more cash per share than its price per share.
Oct. 2011: October's pick has no operating losses in the last 10 years. And positive free cash flow for 10 straight years. Its 10-year average pre-tax return on invested assets is 27.98%. More importantly, the stock trades for just 0.70 times tangible book value and 0.79 times net current asset value. It also has 80% of its market cap in cash.
Sept. 2011: September's pick has no operating losses in the last 10 years. It's 10-year average pre-tax return on invested assets is 26.72%. More importantly, the stock trades for just 0.82 times tangible book value, 0.89 times net current asset value, and 0.98 times net cash. That's right. September's pick isn't just a net current asset bargain. It's a net cash bargain.
Aug. 2011: August's pick has the #1 global market share in its industry. More importantly, 88% of the company's stock price is backed by cold, hard cash. The stock trades for just 0.86 times net current assets. And 0.69 times tangible book.
July: July's pick is a 31 year old company. It hasn't had an operating loss in over a decade. And it's paid a dividend in 13 of the last 14 years. Not bad for a net-net.
June: This month's pick sells for not just less than its net current assets but less than its net quick assets. The company's stock price is just 87% of its cash and receivables minus all liabilities. And today's stock price is 34% less than an all cash offer an attempted acquirer made for this company last year. Plus, the company owns a large part of another business that is carried on its balance sheet using an accounting method that results in the stake being shown as if it was worth less than 2 times earnings! We think this stock has upside potential of 75%.