Using Deep Value Stocks to Judge Market Valuations

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.

Deep Value Companies

Deep value companies are generally the sort that are priced well below book value or even cash value. The company is unloved and under followed by Wall Street and Main street alike.

The only consolation which such companies is that they are priced below net asset value which provides a margin of safety as you clearly know the floor for the price.

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

In the current market, there are only a handful of stocks that meet the criteria of selling for less than its net net value. A rising tide lifts all boats, and by seeing how many net nets are available in the market, you can get a sense of the market valuation.

To see the list of stocks below along with their financial numbers, you can visit the NNWC stock screener page.

You will notice that from the list, each company definitely is cheap for a reason. In the current market, I wouldnt recommend blindly buying a basket of any net nets at the moment, but keep an eye to see whether this list grows or not in order to understand the valuation of the market as well as watching for a no brainer opportunity.

Disclosure: No positions in any stocks mentioned.

Jae Jun runs Old School Value, a value investing service providing stock valuation spreadsheets, stock analysis and value stock screeners for the DIY investor. He writes a weekly Tuesday column for Benzinga.

Jae Jun

Jae Jun runs Old School Value, a value investing service providing stock valuation spreadsheets, stock analysis and (c) 2012 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

 

 

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