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Old School Value

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Ben Graham Net Net Deep Value Stocks

Posted by Jae Jun On November - 24 - 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

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More on this topic (What's this?) Read more on Benjamin Graham, Value Investing at Wikinvest

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9 Responses

  1. Jim

    Excellent posting.

    8:47 pm on 11/24/08
  2. stockmanmarc

    Good post Jae.

    like the new layout

    7:44 am on 11/25/08
  3. Jae Jun

    Glad you guys enjoy it.

    9:43 am on 11/25/08
  4. 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 :) )

    1:04 pm on 11/25/08
  5. Jae Jun

    Hi Miguel,

    Just one of the insert table features in excel :)

    2:38 pm on 11/25/08
  6. 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

    6:41 am on 12/6/08
  7. 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

    2:01 am on 5/19/09
  8. Jae Jun

    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.

    2:11 am on 5/19/09

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