When Christopher Browne joined his father’s firm,  Tweedy Browne (Trades, Portfolio), in 1969, his first job was to pore over mountains of printed information. As he described the job in his book, “The Little Book of Value Investing,” it was a long and tedious process.
He had to go through publications like the monthly Standard & Poor’s Directory of Corporations. What he was looking for was net current assets per share. Browne explained this was one of Benjamin Graham’s favorite measures, and it was calculated by subtracting everything a company owed from its current assets (cash, inventory, receivables and anything else that could be sold relatively quickly). He then divided the amount left by the number of shares outstanding, which produced net current assets per share.
Next, they compared the net current assets per share with the stock’s share price. When stocks were selling for two-thirds or less of the net current assets per share, Graham bought some shares. Browne wrote, “A pretty simple calculation but it was drudge work of the highest order.”
Similarly, he had to go through Polk’s Bank Directory page by page, no small challenge when you learn the publication was a foot high (going through just the state of Illinois alone took four months). From Polk’s, Browne was listing the book value of every publicly traded American bank. Again, if the stock price was two-thirds or less than book value, his firm would buy.
Now, of course, we can find that information with just a few mouse clicks (and GuruFocus allows you to search on literally dozens of different criteria). So, with all this new searching power, what should we do?
Well, you can start with Browne’s first recommendation: “Much as the supermarket sends out sales flyers every week to let you know what is on sale, so does the stock market.” He called these lists of new weekly lows “good starting points in the search for value.”
Not that you stop once you have a list. After all, many of the names on that list of new lows are there for good reasons, such as impending bankruptcies. “Every great corporate disaster would have appeared on the new low list—Enron, WorldCom, all the Internet busts of 2002 would have shown up on one or more of these lists,” he wrote.Â
One way to continue your research is to see what other investors, the professionals, are doing. Most investment managers must file reports on their holdings at least twice a year, making their information readily accessible, directly or as screened by an intermediary. Stocks on their lists that match stocks on our list may be worth further consideration.
Another is to compare the prices paid in corporate mergers and acquisitions to comparable stocks on our list. Such deals are usually considered the equivalent of a knowledgeable buyer purchasing the whole company at an open auction (not that that is always true—some takeovers are atrocious wastes of shareholder capital).
Even looking at the share prices of other companies in the same industry may yield insights, especially when measured against fundamental metrics such as earnings, assets or sales volumes. Browne observed, “Savvy value investors can collect the prices paid in acquisitions, calculate the financials including price to sales, price to EBIT (earnings before interest and taxes), the pretax, pre-interest earnings, and EBITDA (earnings before interest, taxes, depreciation, and amortization), along with other ratios, and keep them in a proprietary database for future reference like I do.”
The author also took an interest in what insiders, senior management and directors, were doing, as noted in a previous article. When running his screens, he looked for companies that had a lot of insider buying over the previous three months. Of course, an investor could run a double screen in order to identify stocks selling below value and experiencing enhanced levels of insider buying.
Note these are just steps along the way, designed to help find stocks with reasonable fundamentals and a margin of safety. To determine the margin of safety, investors must go through the requisite processes that identify a stock’s intrinsic value.
Browne concluded the chapter with these words:
“Whether screening financial databases or watching what other smart investors are buying, you are looking for clues to hidden value. With more than 20,000 publicly traded companies in the world, it is impossible to investigate each one. You have to search for markers much like tracking a deer through the woods. Once you know which markers are most likely to lead to an investment opportunity, your hunt for value becomes much easier.”
Read more here:
- Â Christopher Browne: Finding the Silver Lining When Markets Dip
- Christopher Browne: What Are the Insiders Doing?
- Christopher Browne: Foreign Investments and Treasure Hunts
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