Year to date, the market has gifted investors a 9.92% return, but it remains off 5.73% from the start of the fourth quarter. While many investors are enjoying a lift in their stocks, the Ben Graham Screener, which finds net-nets, has been active.
By the definition of Ben Graham, the founder of value investing, a stock becomes a net-net when its price falls below the outcome of a simple formula: its cash and short-term investments, plus a conservative estimate of its accounts receivable and total inventory, minus its total liabilities (omitting other assets such as land, equipment and intangible assets, and focusing on only liquid and tangible asset value). He called the result “net-net working” capital. Mathematically, his formula looks as follows:
Net-net working capital (NNWC) = cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities
Graham developed the method to buy stocks for less than their liquidation value, and he usually held many. In his seminal book, “The Intelligent Investor,” 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.”
Stocks that meet these criteria tend to perform well. One study found that over one 13-year period, they returned 29.4% on average, compared to an 11.5% rise in the S&P 500.
Typically, bull market environments make net-nets scarce. Market volatility, as seen recently, tends to unearth more. GuruFocus makes finding them easy through its Ben Graham Net-Net Working Capital Screener, a Premium feature. The screener also recently got an update to further simplify the search.
Note: The Ben Graham Net-Net Working Capital Screener extends its reach to stocks that trade between 100-300% of net-net working capital to help generate more ideas, and the stocks from Friday fell into that range.
Friday, the screener identified four new stocks that met its criteria: Diffusion Pharmaceuticals Inc. (DFFN, Financial), Apyx Medical Corp. (APYX, Financial), Electrocore Inc. (ECOR, Financial) and Spherix Inc. (SPEX, Financial).
Diffusion Pharmaceuticals Inc. (DFFN, Financial)
Diffusion Pharmaceuticals is a Charlottesville, Virginia-based biotech and drug company developing treatments for cancer, stroke and other conditions that involve oxygen deprivation. The stock rose 233% year to date and fell 29.29% over the past year. Its stock price dropped 28.57% Friday to close at $5 per share. Its net-net working capital is $2.47.
No investors GuruFocus tracks own the stock except Jim Simons (Trades, Portfolio)’ Renaissance Technologies, which reports 51,840 shares after reducing the position by 83.86% in the fourth quarter.
Diffusion Pharmaceuticals Inc. has a market cap of $17.730 million and annual average earnings growth of 28.20% over the past 10 years.
Apyx Medical Corp. (APYX, Financial)
Apyx Medical Corp. makes medical devices used in cosmetic surgery. Year to date, its stock rose 8.97%, with a 3.98% decline Friday to close at $7 a share. The company has net-net working capital of $2.39 a share.
Three investors GuruFocus tracks hold shares of Apyx Medical: Chuck Royce (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Murray Stahl (Trades, Portfolio).
Apyx Medical Corp. has a market cap of $232.430 million with a price-earnings ratio of 3.67 and price-sales ratio of 4.07.
Electrocore Inc. (ECOR, Financial)
Electrocore Inc. makes medical devices for the treatment of pain and chronic conditions. Year to date, its stock price rose 13.92%. Friday, it dropped 6.67% to $7.56 a share at close. The company has net-net working capital of $2.57 a share.
Of investors GuruFocus tracks, only Steven Cohen (Trades, Portfolio) owns a stake in the company, with 200,000 shares after adding 16.69% in the fourth quarter.
Electrocore Inc. has a market cap of $222.640 million with a price-sales ratio of 397.91.
Spherix Inc. (SPEX, Financial)
Spherix is a patent company focused on intellectual property. Its stock price gained 8.22% year to date and declined 4.33% Friday to close at 75 cents a share. The company has net-net working capital of 26 cents.
The sole investor GuruFocus tracks with a stake in Spherix is Jim Simons (Trades, Portfolio)’ Renaissance Technologies. He held 92,600 shares after increasing the position 190.28% in the fourth quarter.
Spherix Inc. has a market cap of $6.720 million and price-sales ratio of 17.55. Spherix Inc. had annual average earnings growth of 60.40% over the past 10 years.
See more net-net stocks at the new and improved Ben Graham Net-Net Working Screener here.
