NCAV Value stocks - Ben Graham

It seems to me that it is difficult to find enough stocks listed on the ASX meeting the NCAV criteria to create a diverse portfolio. An investor would have to go international. Geoff Gannon has some informative posts about NCAV strategies.

Do you think NCAV stocks make good trading stocks? Gerald Loeb recommended liquid active leaders who make plenty of cash. An NCAV does not meet this!

odds-on, your post reminded me that I finally want to make some comments/conclusions on this thread...and in a way, close it out.

odds-on said:

It seems to me that it is difficult to find enough stocks listed on the ASX meeting the NCAV criteria to create a diverse portfolio. An investor would have to go international.

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...100% agree. I think this has been a useful exercise over approx 12 months to show any prospective NCAV investor (in Australia) that they are definitely going to have to go off shore (as is commonly known, Japan is the storehouse of NCAV opportunities). Australia has a long tail of micro (nano, really) cap stocks. I didn't have any solid expectations, but in hindsight, I'm probably slightly surprised not to have found more (well, there are many - but they're always the previously mentioned mining/energy stocks).

I've personally looked globally (and that includes earlier in this thread) and there is definitely the opportunity for the adventurous indie investor to build that holy grail of a portfolio of stocks where $1 was purchased for 50 cents. So I don't want to discourage anyone. But any newbie who becomes excited about NCAV stocks should get it straight from the beginning - either go international or have long bouts of nothing to invest in (which really hurts results).

There are so many opportunities - and given that you need less than one new stock per month on average...you can actually buy real companies that produce something but are going through terrible times/expectations.

But I can conclude this thread with - you will not be able to find enough qualifying stocks on the ASX to make this approach feasible.


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odds-on said:

Do you think NCAV stocks make good trading stocks? Gerald Loeb recommended liquid active leaders who make plenty of cash. An NCAV does not meet this!

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...Well, NCAV stocks are rather illiquid in general - so as you say...that doesn't make for a trading stock. The shorter your time frame, the more liquid you want your instrument to be (if that's what you meant). For a long term hold - illiquidity can be a positive.


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Also (and I point this out to any current or future newbies, not you odds-on)...remember that NCAV stocks aren't actually meant to look good (e.g. make plenty of cash). The whole approach is about buying a horse where the carcass is worth more than what you paid for the live version (no, I can't believe I just used that analogy, either). I think I used a better analogy earlier in the thread. If you were a car wrecker business person...and you want to pay me $500 for my car - and I take the $500 - if you're a good car wrecker person, you worked out that the car was worth more in scrap than the $500 you paid me. The car is junk. But the junk is worth something - at the right price

I highlight that point strongly, particularly for any newbies...as I really do believe it's a point that gets lost sometimes.

There's several types of 'value' in stock investing. There's the free cigar puff (Warren Buffett's term) of NCAV junk stocks. There's 'distressed' value - a turnaround in company fortunes will provide a disproportionate bounce in pricing. And (back to Buffett) there is buying the so-called, 'wonderful company at a cheap price' (not paying too much for a fantastic company). There's other types as well (the small, speculate growth stock...where you aren't paying 'TOO' much for the prospective earnings, takeover with better management value etc)

That topic is probably worth a thread, and I might start one, on that note. I'd be interested in how other value investors actually see value. Thanks for getting me thinking!


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Last point - if any reader of this thread has any desire for me to post any future findings (of NCAV stocks on the ASX) - please let me know (here or PM). I'm happy to do so, but am just as happy to 'retire' the thread as well (obviously the thread is open, and an NCAV stock can always be posted anyway, for interest).

Or if anyone has a burning desire to start monitoring a global portfolio of NCAV stocks...let me know. But I suspect that there are far more investors who, like myself, invest domestically (though I can see that changing in the near to medium term). If there's interest (as well as a diligent person who will record results including currency effect, and monitoring trades for sell signals - something not necessary thus far in this thread) we could probably do that. It wouldn't be un-interesting to see the result of that, in 10 years time. I'd contribute, but only with help (and knowing that someone was interested).

Final last point - this thread has never been to prove or disprove the NCAV approach (that's already been done). This was simply about posting, in real time, opportunities on the ASX.

Thanks to anyone who has read the thread - I hope you've got at least a little out of it!

This post is just to 'close out' the thread, as I feel that's where it's at (unless the above happens and we go global). Closing it out doesn't mean you can't post to it, or that it's locked. If I find an interesting ASX stock that qualifies, I may well post it. Closing out the thread simply means I'll no longer be deliberately doing so.

Thanks Systematic, I dont think anyone could disagree with your broad points in this thread and its been an interesting thread to follow.

The discussion around various definitions and approaches to value also sounds worthwhile!

systematic said:

KAR Karoon Gas qualifies.

I've often not bothered posting another mining/energy/biotech company; but mention this one as it's by far the biggest NCAV company I've seen on the ASX.

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Nice choice for your last contribution to the thread haha.

WMC WONHE Multimedia Commerce qualifies. Mentioned as it's quite large and liquid (as far as these stocks go), and it's outside of materials/pharmas/energy...in the tech sector.

Would need to roughly double in price to hit NCAV.

Tooth Faerie said:

Nice choice for your last contribution to the thread haha.

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I have got KAR in my NCAV portfolio. I don't normally include resource companies as part of my NCAV portfolio because they tend to burn through cash so quickly. But I have made an exception here - hopefully one I don't live to regret.

I have also added MHI. It is trading at around a 30% discount to NCAV. Does anyone else hold MHI?

I definitely think to implement the Net net strategy effectively one needs to be investing in multiple international markets as no one single market has enough of these stocks these days to make a portfolio. Maybe in another market crash scenario there may be enough of these stocks in Australia but not in normal market conditions.

Value Hunter said:

I definitely think to implement the Net net strategy effectively one needs to be investing in multiple international markets as no one single market has enough of these stocks these days to make a portfolio. Maybe in another market crash scenario there may be enough of these stocks in Australia but not in normal market conditions.

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Yes, you're right, although it probably depends on how many stocks you think are "enough". I don't think you need more than 10. But you'd be hard pressed to find even 10 worthwhile net-net candidates on the ASX. I have found 7 that I would like to propose. They are:

1. CYG at $1.055
   
   
2. MHI at $0.19
   
   
3. KAR at $1.405
   
   
4. CND at $0.19
   
   
5. ZGL at $0.165
   
   
6. CMI at $1.00
   
   
7. ABY at $0.295

The above prices are as at the close of the market on 3 June 2016.

Let's check back in a year and see how they have performed. By way of full disclosure, I own CND, CMI, CYG, MHI and KAR.

Rainman said:

Yes, you're right, although it probably depends on how many stocks you think are "enough". I don't think you need more than 10. But you'd be hard pressed to find even 10 worthwhile net-net candidates on the ASX. I have found 7 that I would like to propose. They are:

1. CYG at $1.055
   
   
2. MHI at $0.19
   
   
3. KAR at $1.405
   
   
4. CND at $0.19
   
   
5. ZGL at $0.165
   
   
6. CMI at $1.00
   
   
7. ABY at $0.295

The above prices are as at the close of the market on 3 June 2016.

Let's check back in a year and see how they have performed. By way of full disclosure, I own CND, CMI, CYG, MHI and KAR.

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We will need to delete ABY from the list: I just checked and it is no longer trading below NCAV. It doubled between the beginning of September 2015 when I first started considering it as a NCAV candidate and mid-May 2016. Its market cap now exceeds its NCAV.

To me a worthwhile net net is a company which is:
-Not a resources or biotech or speculative high tech company.
-It must have generated positive operating cash flow in the last reporting period (could be a quarter or half year or full year. Whatever the most recent report was)
-Must have an overall positive retained earnings figure (i.e. over its full life to date as a listed company it generated a net aggregate positive earnings figure). i.e. some losing years are okay but an overall aggregate loss since listing is not okay.
-I also stick by the strict Graham defintion that it must sell at a price which is no more than two-thirds of net net current asset value. Net net current asset value is defined as current assets minus total liabilities.

I think 10 equally weighted stocks meeting all of my above criteria should be sufficient to create a diversified portfolio.

Value Hunter said:

To me a worthwhile net net is a company which is:
-Not a resources or biotech or speculative high tech company.
-It must have generated positive operating cash flow in the last reporting period (could be a quarter or half year or full year. Whatever the most recent report was)
-Must have an overall positive retained earnings figure (i.e. over its full life to date as a listed company it generated a net aggregate positive earnings figure). i.e. some losing years are okay but an overall aggregate loss since listing is not okay.
-I also stick by the strict Graham defintion that it must sell at a price which is no more than two-thirds of net net current asset value. Net net current asset value is defined as current assets minus total liabilities.

I think 10 equally weighted stocks meeting all of my above criteria should be sufficient to create a diversified portfolio.

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I agree with all of that. One of the hardest things I encounter in Australia is finding NCAVs that are trading at that minimum one third discount to NCAV. It makes me realise just how efficient the Australian market actually is.

I am not sure I agree with you there. Is it a case of the market being relatively efficient or a case of the market being overvalued? I think it is the latter. There are few bargain stocks and many overvalued stocks (at least in my opinion) as opposed to the market being relatively efficient (which would mean few bargain stocks and few overvalued stocks.

Value Hunter said:

I am not sure I agree with you there. Is it a case of the market being relatively efficient or a case of the market being overvalued? I think it is the latter. There are few bargain stocks and many overvalued stocks (at least in my opinion) as opposed to the market being relatively efficient (which would mean few bargain stocks and few overvalued stocks.

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Well, the fact that the market has managed to reduce the gap between price and value in most NCAVs is the whole basis on which investment in NCAVs is predicated. If the gap between price and value were never to close, investment in NCAVs would remain dead money. But happily, as Charlie Munger has said, the efficient market hypothesis is basically correct. It's just that the purists take the theory too far.

Still, you might be right that the reduced number of worthwhile NCAVs possibly indicates that the broader market is overvalued or is reaching overvaluation.

Value Hunter said:

...There are few bargain stocks and many overvalued stocks (at least in my opinion) as opposed to the market being relatively efficient (which would mean few bargain stocks and few overvalued stocks.

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Further to this, I don't know about you but I just find the Australian stock market on average generally efficient in the EMH sense. I remember reading an article a few years back that basically agreed with that view and attributed the reason for it to the number of professional fund managers that Australia has relative to the size of its share market.

By contrast, China and Hong Kong are two markets that I consider particularly inefficient. In the case of China, not only is it inefficient, it is extremely volatile. But both the inefficiency and the volatility are largely due to a greater proportion of flighty day traders in that market relative to the number of level-headed fund managers who, as in more developed markets, generally have some idea of the value of what they own.

Rainman said:

Further to this, I don't know about you but I just find the Australian stock market on average generally efficient in the EMH sense. I remember reading an article a few years back that basically agreed with that view and attributed the reason for it to the number of professional fund managers that Australia has relative to the size of its share market.

By contrast, China and Hong Kong are two markets that I consider particularly inefficient. In the case of China, not only is it inefficient, it is extremely volatile. But both the inefficiency and the volatility are largely due to a greater proportion of flighty day traders in that market relative to the number of level-headed fund managers who, as in more developed markets, generally have some idea of the value of what they own.

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Just a note, from my experience the efficiency of the market as pertains to certain types of value stocks, especially like 0.66*NCAV, is largely dependent on overall market liquidity.

In the depths of Oct 2008, there were a huge amount of net-nets, as market preference was for liquidity. Today, when the market is flush with liquidity and looking to invest, the efficiency is higher and the amount of net-nets are much fewer. You can see older posts in this thread show backtests where the drawdown was >80% in 2008 where the marginal investor stopped caring about buying $1 for 66c.

So efficiency in this context is not a constant, expectations need to be aligned correctly.

sinner said:

Just a note, from my experience the efficiency of the market as pertains to certain types of value stocks, especially like 0.66*NCAV, is largely dependent on overall market liquidity.

In the depths of Oct 2008, there were a huge amount of net-nets, as market preference was for liquidity. Today, when the market is flush with liquidity and looking to invest, the efficiency is higher and the amount of net-nets are much fewer. You can see older posts in this thread show backtests where the drawdown was >80% in 2008 where the marginal investor stopped caring about buying $1 for 66c.

So efficiency in this context is not a constant, expectations need to be aligned correctly.

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I think what you are saying is summed up by the key failing of the EMH: namely, that its theorists were right to conclude that the market is usually efficient but wrong to conclude that it is always efficient.

But market efficiency and liquidity in the sense of perfect liquidity are really the same concept: perfectly liquid pricing efficiency.

Personally, I like the way Howard Marks describes liquidity: it is never there when you need it and always there when you don't.

Large and liquid by the standards of the usual qualifier (and outside mining/energy/pharma)

SRF Surfstitch Group qualifies at the current price below 20c.

I recently became reinvigorated to look for some bargains while reading about some of Carl Icahn's early investments. I have a bit of capital and am not averse to engaging directors where appropriate.

Anyway, I ran a Bloomberg equity screen (I work in the industry) for ncav bargains in Australia using the criteria below:



Here are the five names that it threw up:



I like to check the latest filings on the ASX website to make sure there are no data issues as well as check the cash burn. What I found was:

• Lantern Hotel Group has sold assets and returned capital. Their current NCAV is estimated to be 0.9 to 1.2cps (see link) so with the stock trading at 1 cps there is no value here.

• Premiere Eastern Energy is a Chinese company. The Bloomberg financial data matches with their accounts. Their operating businesses reported cash outflows of nearly $50m in CY16. At this run-rate they will burn through their NCAV in around 3 years. There were some recent audit issues that the directors deemed immaterial. Their auditor is Grant Thornton and their audit partner is Justin Humphrey.

• Spicers Limited data in Bloomberg does not capture $255m in preference shares as liabilities so NCAV is actually negative for this company.

• Sunbridge Group is a Chinese company. The Bloomberg financial data matches with their accounts. Their operating businesses reported cash outflows of $1.3m in the year to March 17. At this run-rate their NCAV will last around 40 years. Their auditor is Grant Thornton and their audit partner is none other than Justin Humphrey.

• XPD Soccer Gear is also a Chinese company. The Bloomberg financial data matches with their accounts. Their operating businesses reported cash inflows of $9m. If this continues their NCAV will increase over time. Their auditor is (you guessed it) Grant Thornton and their audit partner is (you guessed it again) Justin Humphrey.

So looking at the finer detail, we are left with three true NCAV value stocks on the ASX. All are Chinese. All are audited by Grant Thornton. And all are signed off out of Grant Thornton's Adelaide office by a partner by the name of Justin Humphrey.

Having made some inquiries, my feeling is that fabricating the accounts would be difficult for these companies. Auditors check bank balances with banks rather than relying on statements and I have to think that there would be some serious heat on our friend Justin Humphrey at Grant Thornton given where these stocks trade.

That said, one of his other companies (TWT Group, also Chinese, also a NCAV value stock) delisted in 2014 supposedly due to non-payment of receivables so just because the bank balances check out doesn't mean their won't be problems.

For me personally Premiere Eastern is burning too much cash and has volatile working capital so I have steered clear. XPD Soccer has a market cap of $18m which means for me to get to 5% (necessary to call for an EGM demanding a board spill) would cost $1m which is more than I want to put into a single name.

This leaves SBB. Thoughts anyone?

Barneyb said:

This leaves SBB. Thoughts anyone?

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...Only that it appeared in the first list on this thread 2.25 years ago and has been an NCAV stock ever since (well, whenever I've taken a look, so possibly not all the time). It has gone from ~5c to 1c in that time, a loss of 80%. It would have to be one of the cheapest NCAV stocks out there - requiring a 10 bagger move to get to NCAV (as at December statements).
Heck, it's even a very low NCAV stock using just the cash alone.

It 'looks' to me (and it did before) like the 'perfect' NCAV stock. I mean, it's even got cash flow and the like.

With upcoming reporting season, as I've said before, a positive surprise could give the price a jump, whilst the downside, theoretically, seems low. But of course, -80% stocks can go on to lose another 100%(!)

Hope you let us know what you decide, or if you had already etc.

systematic said:

It 'looks' to me (and it did before) like the 'perfect' NCAV stock. I mean, it's even got cash flow and the like.

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This was meant to read:
It 'looks' to me (and it did before) like the 'perfect' NCAV stock. I mean, it's even got cash flow and the like. But is it?