In 1932 at the bottom of the Great Crash, Ben Graham’s fund had dropped 70%, but it was precisely this time when he wrote an article on Forbes about the cheapness of the market and how the market was selling the United States for free. I feel we are close to the same situation.
Stock Market Prognosticator previously shared a list of Net Current Asset Value plays, and I previously wrote about how there were literally hundreds of companies that are being quoted for less than their cash in the piggy bank. One such company that I have analyzed lately is ValueVision Media Inc. These companies are being quoted in the market for much less than their liquidating value, as if they were all destined to be doomed. But does it make sense to be quoted for less than the cash in your hand?
A long time ago a president of the New York Stock Exchanges testified
“In times like these, frightened people give the United States of ours away.”
Graham defined liquidating value very conservatively.
Working capital (current assets less current liabilities) then subtract any debt not included in current liabilities.
But we can be just as conservative yet at the same time find logic in a slight variant of the above formula.
Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities
The formula states that;
To make things easier, you can value net nets and get asset valuation figures as well as run stocks through other value calculation models with the stock valuation calculator. It is designed to perform stock valuation automatically by downloading 10 years of annual data and 5 quarterly statements.
Until recently, it was quite difficult to find a Net Net stock that had real prospects, but the market is washing them up ashore more and more frequently. The tide has finally gone out and here’s a few that came up. Some a gems covered in mud while most a rocks covered in mud.
|Price % to NNWC|
However, these types of asset plays are not suited to everybody. There is a lot of volatility involved and there is a risk the value may never being realized by the market.
As always, due diligence is required and ever more in these situations.