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Ben Graham Net-Net Strategy Delivers Extraordinary Returns Again

July 14, 2011 | About:

In his book “The Intelligent Investor”, Ben Graham, the father of value investing, found that one strategy that worked well was to buy companies that are sold at below its net current asset value. He called those bargains.

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.”

Modern value investors rarely have had the opportunities to invest in these “bargains”, until the market crash in 2008. Inspired by our users, GuruFocus developed a “Graham Net Current Asset Value Screener”, to find these companies:

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

2. During the past 12 months, the companies generated positive operating cashflow.

3. The company has no meaningful debt compared to its cash position.

Over time GuruFocus has “taken pictures” of the top stocks in our Net Current Asset Value Screener, and observe the performances of those stocks. Just as Ben Graham would expect, these stocks delivered extraordinary returns.

Below is the top 20 stocks generated by the screener on Dec. 26, 2008. The performances of the 20 stocks are displayed.

Symbol Date Added When Added Current Change % Comment
HLYS 12/25/2008 2.52 2.24 -11%
VPF 12/25/2008 1.45 2.7 86%
SLTM 12/25/2008 1.35 2.6 93%
MSN 12/25/2008 0.51 1.97 286%
ORBK 12/25/2008 4.06 12.35 204%
SGI 12/25/2008 3.76 15.87 322%
NCST 12/25/2008 0.85 1.77 108% Acqruired at $1.77
PIII 12/25/2008 2.1 5.86 179% acquired at $5.86 a share
DRAM 12/25/2008 1.15 1.59 38%
MTSN 12/25/2008 1.2 1.94 62%
ACSEF 12/25/2008 0.91 1.4 54%
AVNX 12/25/2008 1.04 3.256 213% Acquired
LTON 12/25/2008 1.13 0.9701 -14%
PDII 12/25/2008 3.39 7.72 128%
ACTS 12/25/2008 1.6 2.15 34%
SOAP 12/25/2008 2.46 0.01 -100%
TSPT 12/25/2008 5.45 8.59 58%
VVTV 12/25/2008 0.29 8.29 2759%
AZSEY 12/25/2008 10.14 12.82 26%
GSIG 12/25/2008 1.65 11.99 627%
Average 257.6%

The risk of investing these beaten down small companies has proven to be lower than expected, especially if you buy a basket of them. Among these 20 stocks, we did have a complete loss with one company, Soapstone Networks Inc. Three companies were acquired at premiums. NUCRYST Pharmaceuticals Corp. was traded at 85 cents when added it. It was then acquired at $1.77 per share, resulting a gain of 108%. PECO II Inc. was traded at $2.1 when added. The company was acquired at $5.86 and a gain of 179%. Avanex was traded at $1.04 when the stock had more than $2 of net cash. It merged with Bookham Technologies, forming a new company called Oclaro Inc (NASDAQ:OCLR). The gain we have achieved with this position was more than 210%. 16 stocks of the 20 are still traded.

As the group, these 20 stocks have averaged a gain of 257%. As a comparison, the S&P500 gained 48.5% until yesterday in the same period. 17 out of the 20 stock gained. The biggest gain is from ValueVision Media Inc. (VVTV). Its stock gained more than 2700% over the past two and half years. GSI Group Inc. (GSIG) gained more than 600%. Silicon Graphics International Corp. (NASDAQ:SGI) gained more than 300%. Emerson Radio Corp. (MSN) gained more than 280%. All numbers do not include dividends.

Fast forward today, the market has recovered to a level that not many bargains can be found. The list of “Graham Net Current Asset Value Screener” is also much shorter. In order to reduce risks in investing the mostly micro-cap companies, GuruFocus publishes a monthly Ben Graham Net-Net Bargain Newsletter to highlight one net-net stock a month. 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.

To access the Net-Net Screener and the monthly newsletter, you need to be a GuruFocus Premium Member. If you are not, please take a 7-day Free Trial.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.7/5 (17 votes)


Davidchulak premium member - 6 years ago
Questions: I've noticed that a good number of these have excessively high current ratios....which could be bad. 1. Has any study been done regarding this phenomenon or 2) what's you experience

Yaronguru - 6 years ago    Report SPAM
Thank you for your post!

Please notice, however, the other side of the coin you are pointing to. These companies, selling for less than NCAV, were extremely cheap in the market trough of Dec of 2008 because investors abandoned them like rats from a sinking ship at a time of trouble. These were not good companies. And sure enough, the pendulum overshot on the downswing, rewarding investors on the way back.

But it is inadvisable to compare net-nets to the market only on the upswing of the market; you must include the downswing as well. Ben Graham certainly did.

The outperformance of net-nets, which indeed has been documented, will be put into perspective in this way.


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