NCAV Value stocks - Ben Graham

Every now and then, and purely for fun (yes - I find this kind of thing, fun) one of the things I'll do is look to see if there are any NCA Value stocks about. I have a look, then forget about it (I know - strange idea of fun).

When I first hopped on the forum a couple years back I happened to be looking at a few Graham type "screens" - again, for fun. I do still check in from time to time to see if there are any NCA Value stocks, but don't bother looking at Graham's "enterprising" or "defensive" methods.

I was just having a look yesterday and thought; it wouldn't hurt to have a thread for it. At least that way, whenever I do have a look I can put it in here and if I ever want to check in a year or three later to see how they went, I can. Besides, I know there are a few scattered here and there that like such things.

I'm not going to go into an explanation here...those interested will most likely already know...but if you're interested and don't know what I'm talking about...here is a quick summary page for you.

I check a couple other Graham type screens (every now and then) and may or may not put them in here.

I don't invest directly using the "Ben Graham" formulas. But given that he was around so long ago...and his stuff worked and continued to work (and continues to work) is impressive to me. Respect. He didn't have the computing power we have today, either.

Anyway.

As this is my thread; here are the "rules" (or at least, "requests") for comments...please.

Please keep comments relevant to what is posted. You can talk about the NCAV approach (good points, bad points, definition of, improvements etc). But please keep the comments away from, "hey, how about you test this instead?" This is a thread for NCAV stocks on ASX or other exchanges if you like. Comments to the thread should align with that approach. It doesn't matter if you invest this way, you just have to (like me) be interested. Start another thread if you want to bag out fundamental analysis (which I don't do), value investing, or try and tell me that you're a true Ben Graham fan and he was not a "quant" (he was).

I would especially like to see comments along the lines of analysis of the stocks mentioned, according to your insights or criteria. Why? For fun! That's the only motive.

My own approach is boring - the 3 letter names of stocks are just like numbers the computer has crunched out to me. So, even though I don't do it myself, I sometimes enjoy seeing a good / deeper analysis of a company.

You're also welcome to post any NCAV stocks that you find (ASX or elsewhere). I don't look at this all the time at all, so I'm bound to not get many of them. Try and make sure it is an NCAV stock though, to the best of your ability.

When I mention a stock, I'm going to make the ticker a link to the relevant ASF thread for that stock. Just 'cos I think that's a cool thing to do. Hopefully I remember.

I don't mind being alone in this thread, but hope not.



Sorry for the section on ground rules...I don't mean to post like that...I've just seen other threads taking turns for the worse due to people not respecting the original post. I always try and take note of the original post when commenting in a thread.

A quick descriptor so that it's at the top of the thread...

Lots to find out about if you want to get into "Ben Graham" - this is just a quick definition of this particular method.

What does"NCAV" stand for? Net Current Asset Value.

What does that mean? The value of the current assets of the business, net of liabilities.

How do you calculate it? Couldn't be easier.

• Get a balance sheet. The one with Assets, Liabilities and Equity (Assets minus Liabilities = Owners Equity)
• Find the Total Current Assets. These are things like cash, inventory and receivables. Stuff that is nearly as good as cash.
• Subtract the Total Liabilities. Not just the current liabilities - the whole lot.

You now have the net current asset value.

• Take the market cap and divide it by the net current asset value you just calculated and you have a ratio of the market price of the company to the net current asset value of the company.

It should be fairly obvious that a market cap that is less than the net current asset value (the ratio is less than one) the market is valuing the company at less than its current assets (net of liabilities).

Ben Graham recommended a discount of a third...i.e. paying no more than two-thirds (market cap) to net current asset value. In a way, "buying a dollar for 67 cents" - so to speak. So, it's a "value" investing approach.

Just wanted a simple, step by step "how to" definition near the top of the thread.

Three I ran into yesterday...

AOH
Altona Mining

ONC
Oncard

SBB
Sunbridge Group

FWD - Fleetwood Corporation

CA - $155m
Total Liabilities - $131m

0.84 ratio

Honestly, all the companies posted so far demonstate the problem with relying on the NCAV metric alone, they are all horrible companies and I doubt Ben Graham would have bought any of them.

galumay said:

Honestly, all the companies posted so far demonstate the problem with relying on the NCAV metric alone, they are all horrible companies and I doubt Ben Graham would have bought any of them.

Click to expand...

Appreciate your thoughts. My question back to you would be, "is buying horrible companies a bad thing?"

Regardless. I'm just going by the formula as it is. Whether Ben would have bought them or not, well I don't know.

From Intelligent Investor:

A third and final example of the golden opportunities not
recently available: A good part of our own operations on Wall
Street had been concentrated on the purchase of bargain issues easily
identified as such by the fact that they were selling at less than
their share in the net current assets (working capital) alone, not
counting the plant account and other assets, and after deducting all
liabilities ahead of the stock. It is clear that these issues were selling
at a price well below the value of the enterprise as a private business.
No proprietor or majority holder would think of selling what
he owned at so ridiculously low a figure.

Click to expand...

DJG said:

FWD - Fleetwood Corporation

CA - $155m
Total Liabilities - $131m

0.84 ratio

Click to expand...

Thanks DJG - but I think you forgot to divide the market cap with your figure. Its not just total liabilities into current assets. FWD does not qualify (it has a ratio of over 3)

systematic said:

Appreciate your thoughts. My question back to you would be, "is buying horrible companies a bad thing?"

Regardless. I'm just going by the formula as it is. Whether Ben would have bought them or not, well I don't know.

From Intelligent Investor:

Click to expand...

Fair question, and clearly if you can find 'horrible' companies that are actually good companies in disguise then you have real opportunity and isnt that what most of we fundamental, value investors are looking for?

The problem for me with your examples that reinforces that one metric is not nearly enough is that in all liklihood SBB is some sort of fraudulent rort that will see shareholders lose their shirts.

AOH is a mining company and without looking at its fundamentals at all that would ring alarm bells in the current climate, generally I think highly cyclical, commodity reliant companies like miners are almost impossible to value, hence so many value investors avoid them altogether.

I must confess I didnt look at ONC in the context of my reply.

I dont disagree with the concept of screening with NCAV to see if any gems turn up, but I think a lot more research is then required - as with any primary screen.

EDIT - Question for you! Do you think the universe of companies in the ASX is too small for this filter to be of much use? I looked one of the most undervalued shares in my portfolio based on all of my analysis, UOS and it comes back with a NCAV of about 100%. In fact the only company I own that meets that criteria is one on the NSX.

Just found another of my holdings that is well below the threshold, SND.

Whoops! Ignore what I posted about SND, back to fronted the calculation!

XRF - XRF Scientific
just scraps in 0.93

omac said:

XRF - XRF Scientific
just scraps in 0.93

Click to expand...

I have XRF priced at 20.5c and an NCAVPS of 0.08c so its over 250% rather than below 67%

(I suspect it saves confusion to calculate the per share value, so (Current Assets - Total Liabilities)/shares on issue.

This gives you ab NCAVPS and you are looking for companies where the current price is less than 67% of the NCAVPS.

whoops, I used total assets initially instead of total current assets.

galumay said:

I have XRF priced at 20.5c and an NCAVPS of 0.08c so its over 250% rather than below 67%

(I suspect it saves confusion to calculate the per share value, so (Current Assets - Total Liabilities)/shares on issue.

This gives you ab NCAVPS and you are looking for companies where the current price is less than 67% of the NCAVPS.

Click to expand...

galumay is correct...this is 2.5 times net current asset value, so doesn't qualify.

That's a great point re: getting it to a per share value first and then comparing it to price, if that helps people understand it a bit better.

I just do: MarketCap/(CurrentAssets - Total Liabilities) which will be the same result. So whichever way works for people.

I'm glad you bought it up because it's frustrating trying to work out what's going on when you're new to something, if things are not step by step and clear.

Keep bringing the examples guys, because if you've got the numbers right - great, and if not...you'll learn how to do it.

galumay said:

Fair question, and clearly if you can find 'horrible' companies that are actually good companies in disguise then you have real opportunity and isnt that what most of we fundamental, value investors are looking for?

Click to expand...

...Yes that's true; good companies in disguise is certainly what many value investors (particularly of Buffett style) are looking for. That's the wonderful company at a fair price (or bargain price if you can get it). In this instance (NCAV stocks) though, I just want to point out that it's not quite about that. It's not even really about the "fair company at a bargain price". It's more about, "this car is worth more than I'm paying for it even if I just drive it straight around to the scrap yard". That's the essence of these companies. They can actually be truly bad companies.

Now, what happens in fact, is usually (Ben Graham refers to this) something happens to the company to give it a little more life and up goes the market price. The stats bear this out - not as many of these companies go bust as they "should" statistically, and Ben Grahams suggestion of a change in fortune does happen (often enough).

This is a great point to bring up. It's like; if you pick the horse or sports team and look at the past performances, and go looking for the "best" horse / team...with not a lot of experience, you'll probably be able to pick it. Then, when you get to the bookies, you'll find your pick is the favourite. Value is a different question again; and is the hardest question out there, in some ways. Paying $100k for a Mazda 6 is probably over the odds / over valued. In this case, the Mazda is the best car by far....but the bomb you picked up for $500, spent $500 on...and then sold for $1,500 was an absolute bargain. There the extremes; of course it gets much more fine grained than that, and that's why it's so hard. Eg. You think the favourite is a 50/50 chance but is going out at odds-on...are you happy that the second favourite is 4/1? Does it have an 18,20 or 22% chance? It gets granular like that.

The idea here (specifically with NCAV stocks) is you're aiming for a no question bargain. e.g. You're picking the worst team on the AFL to win...because today they're playing a charity game against the local RSL.

galumay said:

The problem for me with your examples that reinforces that one metric is not nearly enough is that in all liklihood SBB is some sort of fraudulent rort that will see shareholders lose their shirts.

Click to expand...

.....Exactly the sort of comment I'm looking to see. Hoping to see (interested) people analyse these as you have done. I was going to mention the China thing re: SBB (I know of someone who won't invest in these stocks if they have any China connection). So keep those comments coming.

galumay said:

I dont disagree with the concept of screening with NCAV to see if any gems turn up, but I think a lot more research is then required - as with any primary screen.

Click to expand...

...Perfect!

A bit of digging on ONC turned up the China connection again, coincidence much!?

I would ask again, do you think the universe of ASX companies is too small to turn up real NCAV opportunities?

galumay said:

EDIT - Question for you! Do you think the universe of companies in the ASX is too small for this filter to be of much use?

Click to expand...

Probably, yes. But over time and as I look for / find them I'll post them. As mentioned originally, I do it anyway and then forget about it - so why not post it?

Yeah; the only people I know who actually put money into these types of stocks, do it internationally. Can do that here too - doesn't have to just be ASX.

Here are a few current ones:
UGL, CTN, WDS, SHR, ONC, CND, CYG, DLC, SBB, AMO, PPX, QTG, TAG.

Running a backtest for the last 10 years - this strategy still outperforms, but:
1. Only by a little
2. Very few trades, too few to get confident with.

If you did follow it over the last year, you would have done as such:



It wasn't a great year for value strategies.

I think you've done an amazing job with your backtesting and I know you are a value investor at heart.

KnowThePast said:

Here are a few current ones:
UGL, CTN, WDS, SHR, ONC, CND, CYG, DLC, SBB, AMO, PPX, QTG, TAG.

Click to expand...

Just running through them...and I could be wrong too (it's late!) but just a couple of queries...

UGL - no positive NCA
CTN - investment company, so doesn't come up on my radar, can let that slide
WDS - postive NCA but priced greater than NCAV
SHR - ~0.97 (just value, but not Graham value)
CND - ~0.92 (just value, but not Graham value)
CYG - ~0.75
DLC - Yep
AMO - Yep
PPX - Yep
QTG - Yep
TAG - ~0.79

I realise though you might not have been looking at the two-thirds thing, which then leaves only a couple queries.

Also - I posted only 3 stocks as I didnt see the point posting the others I had that had no volume at all / hardly ever trade.

What are others thoughts on that? I ask, because this list reminded me of that, with several being untraded. What does that do for that backtest?

KnowThePast said:

2. Very few trades, too few to get confident with.

Click to expand...

...I do wonder if this is best done globally. I looked at this again with international markets, thinking the bigger opportunity set would allow me to get greedy and ask for heaps of quality factors, and was left with only one or two stocks!
For the pure NCAV approach, and finding stocks liquid enough to trade...I think going global is nearly a given.

KnowThePast said:

It wasn't a great year for value strategies.

Click to expand...

...Definitely agree with that! It was only my momentum trades that did any good - definitely a momentum market in my opinion last year.