(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]
November 24th, 2008 at 8:47 pm
Excellent posting.
November 25th, 2008 at 7:44 am
Good post Jae.
like the new layout
November 25th, 2008 at 9:43 am
Glad you guys enjoy it.
November 25th, 2008 at 1:04 pm
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
)
November 25th, 2008 at 2:38 pm
Hi Miguel,
Just one of the insert table features in excel
December 6th, 2008 at 6:41 am
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
May 19th, 2009 at 2:01 am
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
May 19th, 2009 at 2:11 am
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.
December 22nd, 2009 at 11:49 am
Question: in your calculation of the liquidating value, are you using Net Net WC – all liabilities?
December 23rd, 2009 at 3:41 pm
@ Bob,
Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities
January 21st, 2010 at 7:33 pm
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
January 22nd, 2010 at 9:10 am
@ 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
January 22nd, 2010 at 10:40 am
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.
May 27th, 2010 at 9:20 pm
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!
May 28th, 2010 at 1:32 pm
@ 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.
June 13th, 2010 at 9:12 pm
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”
June 13th, 2010 at 9:35 pm
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.