Benjamin Graham started his investment career in the 1920s. At the time, the stock market seemed like a magic money machine that would only ever go up. But, in 1929, that all changed and Graham's family, like so many other investors at the time, lost everything.
It was this experience that drove the young investor to develop an investment strategy that would work in any environment. The style of deep value investing he went on to create is well known today and has helped many value investors create tremendous fortunes. Investors like Warren Buffett (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) adopted and then adapted Graham's methods with great success.
At the core of the founder of value investing's strategy is the idea of being able to buy $1 for 50 cents. To put it another way, he wanted to buy companies at a discount of 50% or more to their net worth.
In the 1930s, it was relatively easy to find companies trading at such a deep discount. Indeed, up till the 1980s and 1990s, it was still possible. However, in recent years, it has become much harder to find these bargains.
The question is, is it still possible to buy $1 for 50 cents?
Deep value
I believe I have a few companies that meet this criterion in my own portfolio. I will admit, these businesses are not traditional deep-value stocks, and they may not be $0.50 dollars, but they are trading at a deep discount to net asset values.
The first business is Exor NV (EXO, Financial), One of "Europe's leading diversified holding companies, the business is controlled by Italy's Agnelli family, which has been operating it in various forms since 1899.
Exor started as the Fabbrica Italiana Automobili Torino (FIAT) company, which later became the auto business, Fiat Chrysler, that we know today. Exor still has a substantial shareholding in Fiat Chrysler, as well as the businesses that the conglomerate has spun off over the past decade.
Exor owns 22.9% of Ferrari, 29% of Fiat Chrysler Automobiles and 27% of CNH Industrial. On top of this, the group owns 64% of Italy's Juventus Football team and 43% of The Economist newspaper group.
In addition to these equity interests, Exor owns 100% of reinsurance group PartnerRe Ltd., and it has made a handful of seed investments in small businesses.
On the face of it, this is a well-run business that has been owned and operated by its controlling family since the beginning with a focus on long-term value creation. Over the past 10 years, Exor's net asset value per share has grown at a compound annual rate of 17.8% in U.S. dollars. At the end of 2018, net asset value per share was $82.33 or 73.40 euros, compared to the current stock price of 58.10 euros, implying you're getting 1 euro of value for 0.79 cents at the current price.
Private equity owner
Tetragon Financial Group (TGA, Financial) is another possible 50-cent dollar listed in London. At the end of June, this investment company had a fully diluted net asset value per share of $23.94 compared to a share price of $12.45. On top of this, the stock supports a dividend yield of 5.9%.
Tetragon is a closed-end investment fund, which used to own much collateralized loan obligations.
However, in recent years, management has diversified the business away from risky lending toward private equity and real estate. At the end of June 2019, just 11% of the portfolio was invested in bank loans. Net cash constituted 8% of assets under management.
Investments in asset management businesses make up the bulk of assets. Tetragon's most substantial investment is Equitix, an asset management business. The third-largest investment is GreenOak real estate, a real estate investment business.
The market seems to think that these businesses are not worth their appraised value, but a discount of nearly 50% seems to be overdoing it. This could be a true deep value investment.
Disclosure: The author owns shares in Exor and Tetragon Financial.
Read more here:Â
Value Is Cheap, but Is It Worth Buying?Â
Kahn Brothers Vs. Einhorn: Which Value Investor Is Right on Assured GuarantyÂ
Seth Klarman on Admitting Your MistakesÂ
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