NCAV Value stocks - Ben Graham

KnowThePast · 22 March 2015

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

Thanks systematic

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

Should have read your criteria with more attention

I only ran the scan for net-nets: (Current Assets - Total Liabilities) > Market Cap

It was also based on financials as reported in the last full year report, so that results in some data issues.

Narrowing the criteria further will result in ever fewer trades and make it even more meaningless, so I won't.

systematic said:
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?

Excellent question. If you are a large fund, you exclude them, absolutely.

But, if $5000 is a meaningful investment for you, and you can wait months/years before you sell, perhaps you keep them in and see if you find an edge there.

The tricky bit is, let's say you run a net-net strategy with illiquids included and you get a good result. Is it due to net-nets, or due to illiquids? How do you know which one is more important and therefore, which one should be your base filter when you look for stocks?

Are you looking for a fully automated strategy, or one where human decision will be involved to make a final buy/sell decision. This makes a big difference.

systematic said:
...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.

I think there are numerous studies that should this strategy outperforms by 1-5% in most markets, including developed and developing ones.

luutzu · 22 March 2015

systematic said:
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.

Your formula could be wrong.

In "the interpretation of financial statements", Graham and Meredith state, p. 31.:

"The Working Capital is found by subtracting the current liabilities from the current assets."

also, "... the excess of current assets over current liabilities - known as the Net Current Assets or the Working Capital."

They go on to say that this ratio is important in analysing industrials' financial strength...

But I do remember reading somewhere that Graham did suggest that when a company sells below its NWC (NCAV), chances are it could be a bargain. Though it then make sense to think that you'd also take out the longterm debt too, but his definition doesn't seem to include that.

One of Graham's other advice, one that perhaps most of us forget because we tend to think of him as a numbers guy, a quantitative guy... but he did advised that quantitative analysis must always be complemented with qualitative analysis (in security analysis).

So while he did suggest stock below NWC as potential bargains... everything else must be equal. Say, a company could have lots of cash in account and so its NWC looks great. But if we stop there and didn't glance at how it got to that cash, we could be in trouble.

Big difference if the cash were its own savings from operations than from a new round of equity raising to make ends meet.

systematic · 22 March 2015

luutzu said:
Your formula could be wrong.

In "the interpretation of financial statements", Graham and Meredith state, p. 31.:

"The Working Capital is found by subtracting the current liabilities from the current assets.".

It's not wrong. Graham did use the term working capital in that way. But when talking of NCAV he said, "net of all liabilities" - meaning an even stricter "working capital". Zweig also clarifies this in a note in the revised edition. It's also well known and accepted to be this calc...and has been tested as such in academia.

luutzu said:
One of Graham's other advice, one that perhaps most of us forget because we tend to think of him as a numbers guy, a quantitative guy... but he did advised that quantitative analysis must always be complemented with qualitative analysis (in security analysis).

You are spot on...he absolutely did say that. In fact, immediately after describing NCAV bargain issues, he stated that a company that is a "bargain" by this measure is, "interesting" but not necessarily value.
It does "work" in an auto fashion...but Graham himself certainly did emphasise the qualitative; you are spot on there.

I guess hence the thread (well, no really it was just a place to post them and whoever wanted to comment was welcome). i.e. I'm interested in hearing peoples qualitative analysis.

For example, the China factor with SBB...

systematic · 22 March 2015

Was anyone looking for these type of stocks around 2008 / 2009? Were there many about?

skyQuake · 22 March 2015

Correct me if im wrong but KAR and MGX look like they fit the bill using recent data?

KAR (532 mcap, 694 curr asset, 148 total liab) 0.97
MGX(234 mcap, 409 curr asset ,139 total liab) 0.87

systematic · 22 March 2015

skyQuake said:
Correct me if im wrong but KAR and MGX look like they fit the bill using recent data?

KAR (532 mcap, 694 curr asset, 148 total liab) 0.97
MGX(234 mcap, 409 curr asset ,139 total liab) 0.87

Yep; they'd need to come down in price a bit more though to have the 1/3rd margin of safety...but definitely positive NCAV.

skyQuake · 22 March 2015

This is looking back using historic ASX300 constituents. (nothing in 2007 or 2006 interestingly enough)

Havent check against annual report, but the curr assets, total liab are from "latest filing" according to data source. eg 22nd Mar 2014 KAR uses 9th Dec 14 filing data

systematic · 1 April 2015

skyQuake said:
This is looking back using historic ASX300 constituents. (nothing in 2007 or 2006 interestingly enough)

Havent check against annual report, but the curr assets, total liab are from "latest filing" according to data source. eg 22nd Mar 2014 KAR uses 9th Dec 14 filing data

...Thanks skyQuake! Do you invest in them?

systematic · 1 April 2015

GDY Geodynamics Limited.
Qualifies as below NCAV with the 33% discount rule.

luutzu · 1 April 2015

systematic said:
It's not wrong. Graham did use the term working capital in that way. But when talking of NCAV he said, "net of all liabilities" - meaning an even stricter "working capital". Zweig also clarifies this in a note in the revised edition. It's also well known and accepted to be this calc...and has been tested as such in academia.

...

OK, stand corrected.
Graham did define as such in "interpretation of fs" under Liquidating Value and NCAV.

luutzu · 7 April 2015

luutzu said:
OK, stand corrected.
Graham did define as such in "interpretation of fs" under Liquidating Value and NCAV.

Actually... might not have been wrong afterall.

Going through Security Analysis it seems that Net Current Assets, which is Net Working Capital (even though NWC can sometime be define by some people as the net net asset, i.e. CA minus total liabilities), it's taken to be just Working Capital (CA - CL)....

From the examples he gave, seems NCAV is simply a literal NWC definition, not the net net.

Graham interpret NCAV to be a rough approximate of what he call Liquidating Value - the cash that can be taken out if all debt are paid and all assets sold for cash.

This, I think, is a shorthand to get to the Liquidating Value (LV)... but it is not the liquidating value itself - just a close approximate.

If we are to find the LV... Graham's examples and advice said we can't just take the Current Assets at its book value, but must do some adjustments - example, Cash is at 100% adjusted for liquidation; inventory at 50 to 70% book value; receivables at 75-90% book value etc.; for non-current assets then, it should be assume they could be sold for 20% their book.

So to get to these cigar butt bargains, its NWC approximates its liquidating value... the net net current assets could be too conservative as it take away all the liabilities but give no consideration for the longterm assets (which is worth at least something)... and at the same time assumes you could redeem all 100% of the current assets in a fire sale.

Being conservative is good i guess... but it might not be what Graham meant.

Also in the examples I didn't see him minus the non-current liabilities... but here it's probably because those companies doesn't have any, and conserving that all debts are to be paid is sensible.

systematic · 17 April 2015

In light of a recent thread on international investing, I thought I'd have a look for any decent sized NCAV stocks around the world (limited to exchanges that IB cover). The idea being, as mentioned previously in this thread, that with this type of, "specialised" investing, you probably need to expand your universe - if you want to actually have some stocks to invest in.

Turns out that about right, with this method anyway. Now, you don't expect to find many NCAV stocks of a decent market cap anyway - but that's the point of looking further afield.

After doing some clean up (e.g. Class H stocks in HK)...I was only left with 5 stocks (above $200M) that met both the criteria of net current assets being positive and priced at a 1/3rd discount (or more) by the market.

They are:

Hong Kong
Enerchina Holdings
Emperor Watch & Jewellery

Japan
Shinko Shoji Co
Funai Electric Co
Sanshin Electronics Co

systematic · 28 April 2015

At double its recent price, PPX Paperlinx still qualifies.

MPO Molopo Energy is another qualifier not already mentioned.

Tooth Faerie · 1 May 2015

What programs or platforms is everyone using to screen for these stocks? Also what metrics are you all using?

I've had no luck using the metrics available on commsec.

galumay · 1 May 2015

Tooth Faerie said:
What programs or platforms is everyone using to screen for these stocks? Also what metrics are you all using?

I've had no luck using the metrics available on commsec.

Metrics are Current Assets, Total Liabilities and price or capitalisation. All on Commsec.

I dont think its possible to screen for NCAV on most platforms, I use a spreadsheet that I enter the data into and a formula to extract the NCAV.

You can screen to get a universe they are more likely to exist in, price firstly - I doubt you will find any companies trading for more than $1 that end up meeting the criteria.

Price to Book set to below 1 will help - nearly all NCAV candidates will have very low book value.

Price to Sales likewise, will be very low, maybe under 0.5

Obviously they will be low debt so set the Debt to Equity as low as possible.

Regardless, I dont believe you will find more than 1 or 2 in ASX, I believe you have to go hunting off shore to turn up more than a few.

Of course even after you find one, you have to check whether its a worthwhile investment anyway.

systematic · 1 May 2015

galumay said:
You can screen to get a universe they are more likely to exist in, price firstly - I doubt you will find any companies trading for more than $1 that end up meeting the criteria.

Price to Book set to below 1 will help - nearly all NCAV candidates will have very low book value.

Price to Sales likewise, will be very low, maybe under 0.5

Obviously they will be low debt so set the Debt to Equity as low as possible.

Regardless, I dont believe you will find more than 1 or 2 in ASX, I believe you have to go hunting off shore to turn up more than a few.

Of course even after you find one, you have to check whether its a worthwhile investment anyway.

galumay suggests a couple of good ideas for those looking for them.
They all currently have a price to book less than 1.
I wouldn't use price...but galumay is correct - none currently over $1
You can also use market cap less than $100M to get them all.
Don't use price to sales though. Some of them have high ratios. i.e. That's how "bad" they are...even though they are "dirt cheap" their sales are so poor that they are actually expensive on that measure.

Also - remember - the point isn't necessarily to find the good companies amongst these. It's to roughly put you in the ball park of finding companies that are still worth something even if they go on the scrap heap. I'm not saying you shouldn't go looking for the better companies (that was actually one of the major points of this thread - to see people's analysis of these companies - unfortunately there has not been a lot of that).

For example, one of my ideas is that (maybe) a good way to analyse (or cull) further...is - rather than look for "good companies" or good quality criteria (for the reasons mentioned)...as these companies are dogs, perhaps the better measures to look at are more the "safety" criteria. Z score, etc.

Using these sorts of filters, leaves me with about 5 companies on ASX - currently.

Tooth Faerie · 1 May 2015

galumay said:
Metrics are Current Assets, Total Liabilities and price or capitalisation. All on Commsec.

I dont think its possible to screen for NCAV on most platforms, I use a spreadsheet that I enter the data into and a formula to extract the NCAV.

Sorry I wasn't a bit clearer. I also have a spreadsheet to calculate NCAV but I was wondering if there was a stock screener that could perform, well a better screen than what I'm getting.

galumay said:
You can screen to get a universe they are more likely to exist in, price firstly - I doubt you will find any companies trading for more than $1 that end up meeting the criteria.

Price to Book set to below 1 will help - nearly all NCAV candidates will have very low book value.

Price to Sales likewise, will be very low, maybe under 0.5

Obviously they will be low debt so set the Debt to Equity as low as possible.

Regardless, I dont believe you will find more than 1 or 2 in ASX, I believe you have to go hunting off shore to turn up more than a few.

Of course even after you find one, you have to check whether its a worthwhile investment anyway.

I was using P/B < 1 as a screening metric but had to wade through so much garbage including illiquid exploration companies that it became very time consuming.

Thanks for the tip on Debt/Equity.

EDIT: Ugh, commsec's stock screener doesn't have a debt/equity metric toggle. I don't know how you guy are able to screen so well.

systematic said:
galumay suggests a couple of good ideas for those looking for them.
They all currently have a price to book less than 1.
I wouldn't use price...but galumay is correct - none currently over $1
You can also use market cap less than $100M to get them all.
Don't use price to sales though. Some of them have high ratios. i.e. That's how "bad" they are...even though they are "dirt cheap" their sales are so poor that they are actually expensive on that measure.

Also - remember - the point isn't necessarily to find the good companies amongst these. It's to roughly put you in the ball park of finding companies that are still worth something even if they go on the scrap heap. I'm not saying you shouldn't go looking for the better companies (that was actually one of the major points of this thread - to see people's analysis of these companies - unfortunately there has not been a lot of that).

I concur. After a quantitative look, I then look at the company on a qualitative basis. Most don't pass. The ones mentioned in this thread that seem okay are PPX and AOH. The others have either now exceeded NCAV or look dodgy.

systematic said:
For example, one of my ideas is that (maybe) a good way to analyse (or cull) further...is - rather than look for "good companies" or good quality criteria (for the reasons mentioned)...as these companies are dogs, perhaps the better measures to look at are more the "safety" criteria. Z score, etc.

Using these sorts of filters, leaves me with about 5 companies on ASX - currently.

Perhaps you're onto something with this idea.

systematic · 11 May 2015

IAU Intrepid Mines qualified this time last week. It's still at a 30% discount to NCAV (close enough to 33% to not get fussy!)

KRB Krucible Metals qualifies, though to date in this thread I haven't been posting picks with this low $ volume traded.

Which leads me to a question I might post in a new thread, to get answers from those who might not be following this one. I'll come back and edit this post to include link to that thread.

systematic · 11 May 2015

systematic said:
Which leads me to a question I might post in a new thread, to get answers from those who might not be following this one. I'll come back and edit this post to include link to that thread.

Which would be this thread

systematic · 14 May 2015

A stock under 1 cent!
IGS qualifies.

This company just might take your portfolio to new highs (joke - read the company announcement)

Doing an average 58k a day in $volume since announcement.

NCAV Value stocks - Ben Graham

KnowThePast

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systematic

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skyQuake

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skyQuake

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luutzu

luutzu

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Tooth Faerie

galumay

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