Ben Graham Net Net Deep Value Stocks

November 24th, 2008

(This article first appeared on The DIV-Net)

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.

Deep Value Companies

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.”

Liquidating Value

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.

The Net Net Working Capital.

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities

The formula states that;

cash and short term investments are worth 100% of its value
accounts receivables should be taken at 75% of its stated value because some might not be collectible
take 50% off inventories, due to discounting if close outs occur

The Table of Steals

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
VVTV	15.03%
ASFI	16.18%
NUHC	18.14%
SPF	24.57%
PLI	26.28%
TAIT	26.42%
CRV	29.96%
BZH	34.79%
TBAC	35.14%
TWMC	35.92%
MSN	36.64%
TUES	41.20%
NENG	42.12%
HDNG	44.40%

To run the screen yourself, go here. The top 7 are already trading at a huge 66% margin of safety.

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.

Disclosure: I own VVTV at the time of this writing

[tags]ben graham, net net, VVTV,ASFI,NUHC,SPF,PLI,TAIT,CRV,BZH,TBAC,TWMC,MSN,TUES,NENG,HDNG[/tags]

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Tags: ben graham, Stock Analysis, valuation, vvtv

- Jim

Excellent posting.

- stockmanmarc

Good post Jae.

like the new layout

- Jae Jun

Glad you guys enjoy it.

- Miguel

I like your new layout. Great Article. Really like the radar charts. How do you design them… Keep up the great work. (Your on my nighty list again )

Hi Miguel,

Just one of the insert table features in excel

- Stock Pursuit

yeah, with the shear number of net-nets and that its looking like the financial system isn’t going to end it seems like it is time to bottom hunt. this run with the financial stocks and homebuilders is crazy. Maybe time to load up for the next up leg and sell before the market tanks again in a year or so

Stock Pursuit’s last blog post..Fellow Bloggers & Internet Marketers Will Like This

- Jeremy

Hi Jae – This is great to see Graham’s net-net formula written out so clearly – didn’t he recommend buying as many companies as possible that were selling at 2/3 or less of their net-net value? Did you end up buying any of these while they were down?

Jeremy’s last blog post..The Forrest Gump Guide to Becoming an Investing Genius

Hi Jeremy,

He did recommend buying as much as possible if it was selling for less than 2/3 of its value. I did buy some but not all.

In the list above, I bought VVTV and I liked ASFI but didn’t buy for some reason. Completely missed out on TUES.

My other net net holdings include LTON, PDII, HRAY, IGOI and SOAP. I’m happy with my current selection and will look to buy more if I can get more cash.

- bob

Question: in your calculation of the liquidating value, are you using Net Net WC – all liabilities?

@ Bob,

- Troy

Can someone help me with this question?

When we are calculating Net Net Working Capital based on a semi worse case scenario to find an approximate value, why do we not include a fraction of retained earnings and/or paid in capital on the plus side. Theoretically if we are evaluating a company on a hypothetical liquidation situation aren’t the retained earning and paid-in-capital utilized and worth the same as cash?

Net Net Working Capital = Cash and short-term investments + retained earnings + paid-in-capital + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities

@ Troy,

Very interesting thought! Retained earnings and paid in capital is reported under shareholders equity and in the event of a liquidation, I’m sure we would be entitled to some of that. Maybe not all, but at least 50% of shareholders equity should be returned. Meaning, this is a possible inclusion to the net net formula.

Thanks a lot

Made a mistake.
Shareholders equity is net book value while the purpose of NNWC and NCAV is a stricter version of book value. So while you could add retained earnings and paid in capital back into the equation, it would be just be closer to book value.

- Eric

Great post, How do I personally do my own screen? Is there any screening software out there? Also how long did you end up holding VVTV!

@ Eric,

I have my own spreadsheets to run each company to check whether is a NNWC. I have the spreadsheet free for download.

I’m still holding VVTV.

- Shane

NNWC would be measured in Millions or Billions respectively to the assets and liabilities in the equation… so when calculating “P% to NNWC” you’re using Total Market Cap/NNWC correct? Or is it Price per share/NNWC per share)? Is it “total market price of the company% to NNWV” or is it “share price% to NNWV”

The price % is the same for both total market share and per share values. If I use total market share, the NNWC is not divided by the shares outstanding. If it is share price %, then NNWC is divided by shares outstanding to keep everything the same.

- Ziv

Hey Jae!

thanks for this wonderful site.

I checked the screen today and looked at many of the companies – a lot of them are burning through cash. What prevents the company from driving it’s intrinsic value (and the liquidation value) to zero over time?

Do you suffice looking at net nets percentage or do you also look at the fundamentals?

Thanks,
Ziv.

Hi Ziv,

It depends on the company you look at.
Some burn through cash, some don’t because they stop operations.
The important point is to find out which ones are less likely to burn cash and invest in the ones that have potential to work back to marginal profitability.

Ben Graham Net Net Deep Value Stocks

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