As global markets continue to face headwinds from the novel coronavirus (Covid-19), value investors are shopping for bargain stocks.
One bargain-hunting method used by legendary value investor Benjamin Graham was to look for stocks trading at less than their net current assets alone. These stocks trade below their net-net working capital (NNWC), which is calculated by adding cash and short-term investments to 75% of the value of accounts receivable and 50% of the value of inventory, then subtracting total liabilities.
Stocks trading below their net-net working capital have strong balance sheets, and even if they were to go bankrupt and be liquidated, shareholder losses would be limited. These companies are often ones that have fallen on hard times but were saved from bankruptcy by their strong balance sheets and efficient allocation of capital. Graham recommended holding a diversified portfolio of these companies for the long term, as the market might take a few years to realize their value.
GuruFocus’ Benjamin Graham Net-Net Working Capital Screener filters for bargain stocks based on these principles. Since Graham’s time, companies have gained increasing value in intangible forms such as intellectual property and digital assets, so the GuruFocus screener includes stocks trading up to three times NNWC as well. As of March 4, the companies identified by this screener included Knight Therapeutics Inc. (TSX:GUD, Financial), mixi Inc. (TSE:2121, Financial) and Taro Pharmaceutical Industries Ltd. (TARO, Financial).
Knight Therapeutics
Knight Therapeutics is a Montreal, Canada-based specialty pharmaceutical company. It mainly focuses on acquiring, in-licensing, selling and marketing innovative pharmaceutical products.
On March 4, shares of Knight Therapeutics traded around 6.84 Canadian dollars apiece ($5.10) for a market cap of CA$927.70 million and NNWC of CA$2.82 per share.
The company has a GuruFocus financial strength rating of 8 out of 10 and a profitability rating of 3 out of 10. The cash-debt ratio of 585.09 and Altman Z-score of 9.52 are higher than 85% of competitors.
Knight Therapeutics has a three-year revenue growth rate of 99.2%, but a three-year earnings per share without non-recurring items growth rate of -21.4%. According to the Peter Lynch chart, shares are trading near their intrinsic value.
Mixi
Mixi Inc. is a Japanese social networking company that primarily operates websites and native smartphone games.
On March 4, mixi shares traded around 1,742 yen apiece ($16.23) for a market cap of 131.26 billion yen and NNWC of 1,430 yen per share.
GuruFocus has assigned mixi a financial strength rating of 10 out of 10 and a profitability rating of 9 out of 10. The company has no debt and an Altman Z-score of 6.08, putting it ahead of 99.6% of industry competitors.
The return on capital of 193.52% and operating margin of 15.59% indicate the company uses its capital efficiently, though the three-year revenue growth rate of -9% suggests that it may have experienced trouble increasing its profits in recent years. According to the Peter Lynch chart, shares are trading below their intrinsic value.
Taro Pharmaceutical
Based in Israel and headquartered in New York, Taro Pharmaceutical is a research-based drug manufacturer with over 180 products sold in more than 25 countries around the world.
On March 4, shares of Taro Pharmaceutical traded around $67.89 apiece for a market cap of $2.36 billion and NNWC of $27.84 per share.
Taro Pharmaceutical has a GuruFocus financial strength rating of 10 out of 10 and a profitability rating of 8 out of 10. With no debt and an Altman Z-score of 8.65, the company’s financial strength is higher than 99.89% of competitors.
The operating margin of 42.07% and return on capital of 92.2% suggest that the company allocates it capital efficiently. However, the three-year revenue growth rate of -8.2% suggests the company has seen its profits decline on average in recent years. According to the Peter Lynch chart, the stock is trading below its fair value.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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