NCAV Value stocks - Ben Graham

systematic · 25 May 2015

CYG Coventry Group now qualifies as an NCAV at the required discount, and is one of the more liquid ones menioned thus far. Also (relatively) one of the better quality of those mentioned thus far, in my opinion.
Also pays a dividend - which is rare with these.

z15 · 26 May 2015

Hi. I recommend free unclestock.com screener for NCAV stocks.

systematic said:
CYG Coventry Group now qualifies as an NCAV at the required discount, and is one of the more liquid ones menioned thus far. Also (relatively) one of the better quality of those mentioned thus far, in my opinion.
Also pays a dividend - which is rare with these.

What about its restructure program? Costs are estimated to be in order 6-7milions A$. I think NCAV will be impaired.

Cheers!

systematic · 30 May 2015

MSR Manas Resources qualifies. Doing about $13k on the days it trades.

It's an example of a sick looking company, impossible to buy. But then, that's the thing with these...
It would have to nearly triple in price to reach NCAV. But any kind of qualitative look would put you off. Let's see what happens.

Miner · 31 May 2015

systematic said:
MSR Manas Resources qualifies. Doing about $13k on the days it trades.

It's an example of a sick looking company, impossible to buy. But then, that's the thing with these...
It would have to nearly triple in price to reach NCAV. But any kind of qualitative look would put you off. Let's see what happens.

please check common connection with MNS and PRU

systematic · 11 June 2015

MSN Emerson Radio is about the only qualifying US stock (worth mentioning) that comes up at the minute.

North of that border, I get VLN Velan Inc.

systematic · 12 June 2015

A quick look over Europe way and I only get a couple from Germany:

V33 Vtion Wireless Technology (technology company with operations in China) and EIN3 Einhell Germany (Home and Garden products).

systematic · 12 June 2015

Same sort of criteria.

Back down under, I only get the previously mentioned SBB Sunbridge Group.

systematic · 12 June 2015

Just north of us I get:

Singapore
W81 Universal Resource and Services
A55 Asia Enterprises Holding

Hong Kong
0398 Oriental Watch Holdings
1079 Pine Technology Holding

systematic · 12 June 2015

Final stop is, appropriately, the land of the value investor. We've had 9 NCAV stocks from our quick trip around the world, but this single country adds another 6 to the collection. Any value investor who looks internationally will already know where I'm talking about. Can you guess? Pretty easy guess, considering those already covered...

systematic · 12 June 2015

...yep, the land of the rising sun is also well known as the land of the value stock.

Here we have:

7565 Mansei Corporation
6839 Funai Electric
2055 Nichiwa Sangyo
2737 Tomen Devices
8141 Shinko Shoji
7420 Satori Electric

systematic · 12 June 2015

Side note: Some of these stocks (above) from this little around the world trip have their major operations in China. That might rule a few of them out for some.

systematic · 14 June 2015

This time I looked at demanding excess cash (over and above a generous current ratio).
Sub-criteria were simply negligible debt (doesn't make sense to have excess cash and be heavily indebted), revenues (ongoing operations) and a deeper NCAV. I then ommited those that were Chinese (e.g. HK class H) or those that looked like they have their major operations there.

Left with only two, both UK listed:

BSD BSD Crown - an Israeli based IT company.

PVCS PV Crystalox Solar - UK based solar energy company with international operations.

Rainman · 15 June 2015

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.

Well, one can say that all the companies posted above are "horrible companies". But the only horrible companies are those that do not provide an adequate return for the risk assumed or that result in permanent capital loss. So let's look at the return of the companies posted above since 20 March 2015 (the date when they were first referred to):

AOH: 4%

ONC: -7.5%

SBB: 6%

FWD: 6.34%

This makes a total return since 20 March 2015 of 4.62% against a -4.5% return for the ASX/SP 200 for the same period. Actually, the result of the posted stocks is better than 4.62% because ONC is buying back most of its outstanding shares at 0.22 per share. So the total return for the period is 6.7%. That is for a holding period of less than 3 months. Annualised, the total return equates to over 26%.

Now, one might say that the return of holding a portfolio of stocks like these reflects the risk of a permanent capital loss. All of these stocks stand a higher chance of ultimately becoming insolvent. But that argument is not only wrong as a matter of fact. It fails to understand the strategy behind buying stocks trading well below NCAV.

To see why that is the case, consider ONC which is one of stocks posted above. At its current closing price of 0.185, one can buy it for a more than 40% discount to its net cash alone. ONC is thus truly a case where one can buy $1 for 0.60c. Finally, if one counters that a portfolio of stocks trading below NCAV is inherently more volatile, then I would like to see the research or backtesting that shows that. The research that I have seen suggests the opposite.

systematic · 15 June 2015

Rainman said:
But the only horrible companies are those that do not provide an adequate return for the risk assumed or that result in permanent capital loss.

...I'm with you, Rainman.

I haven't really been looking at results much (too early, was maybe going to come back in a years time). Having said that - it might be cool to do a model portfolio once decided on where / when / how etc...will have to think about that.

In light of your post, I thought I'd take a look at the first lot of international stocks back in post #32 - just for fun (not expecting anything, after all, it's only been 8 weeks).

I've not looked at relevant indexes to compare performance, but in raw form (local dollars):

Hong Kong
Enerchina 77.5%
Emperor Watch and Jewellery 18.5%

Japan
Shinko Shoji 8.5%
Funai Electric 6.5%
Sanshin Electronics 30%

That's 28% averaged on those five, with none currently at a loss. Now, this is all an insignificant time period / fluke etc. But it would have been the real time experience of someone investing in these (for part of their portfolio, anyway).

These picks were the simplest of all (didn't demand positive revenues, low debt or anything...)
They were simply "raw" NCAV stocks of a decent size / trading liquidity. I figured going offshore is different enough for a lot of investors anyway (such as myself) without dealing with illiquid microcaps.

Given the number (lack of) of these stocks available in Australia, this might actually make for a good "model portfolio" - simple "raw" NCAV in companies that are truly tradeable by the average (if small) investor. That way you also avoid the influence of (albeit sensible and minimal) 'extra rules'. If (and it is an if) you can get 5 or so stocks just 2 or 3 times a year, at a given point in time - it might be possible to have a "real" portfolio of these. I wouldn't expect quite as good a result as with the micro / nano caps...but it would at least be realistic.

systematic · 15 June 2015

systematic said:
Hong Kong
Enerchina 77.5%
Emperor Watch and Jewellery 18.5%

Japan
Shinko Shoji 8.5%
Funai Electric 6.5%
Sanshin Electronics 30%

I should add:

a) If selling at NCAV, Enerchina would've been sold 2 days after buying for a 26% gain.

b) Looking at the exact same criteria as then, I only come up with the remaining 4 stocks already mentioned...nothing additional.

systematic · 15 June 2015

systematic said:
Looking at the exact same criteria as then, I only come up with the remaining 4 stocks already mentioned...nothing additional.

...Interestingly, but perhaps not unexpectedly, going just a bit lower in min. market cap (~150M AUD, well and truly qualifying as an ALL ORDS stock by Aussie standards) increases the available opportunities three-fold to 12 stocks (including the 4 already mentioned). All are available to trade via IB.

12 decent sized stocks available at a single point in time means that (most likely) a 20 or 30 stock portfolio of these should be easily available over the course of a year or two (hold times are going to be longer on average) - making it possibly a tradeable method for the individual investor willing to go global, but perhaps not willing to go as far as the micro/nano caps.

Obviously my thoughts have been evolving re: this strategy.

Rainman · 15 June 2015

systematic said:
... it might be cool to do a model portfolio once decided on where / when / how etc...will have to think about that.

I have been running a model portfolio of net-nets since re-discovering Graham's strategy earlier this year and the results continually surprise me. Why is it that these cheap, seemingly terminal stocks so clearly outperform the market?

The research that I have read has not been able to fully account for it but all the studies undertaken are unanimous that value not only outperforms the market year after year but massively outperforms growth stocks.

systematic · 15 June 2015

Rainman said:
I have been running a model portfolio of net-nets since re-discovering Graham's strategy earlier this year and the results continually surprise me. Why is it that these cheap, seemingly terminal stocks so clearly outperform the market?

Yep, they do - and (obviously, since Graham wrote about it long ago) for a very long out of sample period. I'm as amazed as you.
Oh cool - someone actually trading these (or are you just monitoring them?) Whereabouts are you investing (which regions?) and how small are you going, market cap / liquidity wise?

Rainman said:
The research that I have read has not been able to fully account for it but all the studies undertaken are unanimous that value not only outperforms the market year after year but massively outperforms growth stocks.

Absolutely true. Stocks and other asset classes, even. For me, personally - I lean totally towards the behavioural reasons (without completely discounting the others) and these investor tendencies / human behaviour form a central tenet of my 'trading plan.'

I think the NCAV method is one of the more interesting of the different ways to approach value. Definitely one for the individual / smaller investor - no one else can do it.

Rainman · 15 June 2015

systematic said:
Oh cool - someone actually trading these (or are you just monitoring them?) Whereabouts are you investing (which regions?) and how small are you going, market cap / liquidity wise?

I have just selected a few for a model portfolio and am only monitoring them at this stage. However, given how happy I am with the results, I am going to invest in a selection of them in Japan and South Korea shortly. These two places have the most net-nets as far as I am aware, although Hong Kong has a quite a few too.

In terms of perimeters, I am not very comfortable in investing in anything that has less than a $20 million market cap. Some other things that I watch out for are the burn-rates at which these companies are going through their cash. If the burn-rate is 25% or more per year, they are out. The same thing goes for debt-to-equity ratios of 50% or more. I think that it is also critical to get a 10 year view of the company's financial position and see how it has changed over that time. That way, you can see whether the business of the company is viable or in terminal decline.

For instance, someone mentioned Emerson Radio (MSN) in the US as a net-net candidate. But I am not sure whether that business is any longer viable. That said, it is trading at over a 45% discount to NCAV - and most of its assets are cash or cash equivalents. So again, just because it is a crappy business doesn't mean you can't earn a great return on it.

systematic · 15 June 2015

Rainman said:
I have just selected a few for a model portfolio and am only monitoring them at this stage. However, given how happy I am with the results, I am going to invest in a selection of them in Japan and South Korea shortly. These two places have the most net-nets as far as I am aware, although Hong Kong has a quite a few too.

In terms of perimeters, I am not very comfortable in investing in anything that has less than a $20 million market cap. Some other things that I watch out for are the burn-rates at which these companies are going through their cash. If the burn-rate is 25% or more per year, they are out. The same thing goes for debt-to-equity ratios of 50% or more. I think that it is also critical to get a 10 year view of the company's financial position and see how it has changed over that time. That way, you can see whether the business of the company is viable or in terminal decline.

For instance, someone mentioned Emerson Radio (MSN) in the US as a net-net candidate. But I am not sure whether that business is any longer viable. That said, it is trading at over a 45% discount to NCAV - and most of its assets are cash or cash equivalents. So again, just because it is a crappy business doesn't mean you can't earn a great return on it.

Love it. And you're the first person on this thread to talk about why you'd use which "extra rules" (possibly).

With a lower cap of $20M (and some patience) I think it might be possible to be a little more selective.

Just checked the 12 stocks mentioned a couple posts above. Purely coincidental, but they all have sales and they all (but 2) actually have operating earnings. Might be because of the higher cap range.
Previously I looked at free cash flow, net financing etc. Jury still out for me on all that. Based on general research, I'd suggest that an NCAV that is diluting its shareholder's stake is really worrisome; if the management had some belief in the future of the company, they ought to be buying stock. Nonetheless, it's comforting (as you mentioned in your example with Emerson Radio) to know that research containing the spectrum of these companies shows the results we're familiar with.

NCAV Value stocks - Ben Graham

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