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Net Current Asset Value according to Ben Graham (NCAV)

Finding low-risk stocks should be priority number one in the stock market.

Benjamin Graham, considered by many to be the architect of fundamental analysis, described a strategy for identifying deep value stocks, which in his view are low-risk candidates, in his book, "The Intelligent Investor," published in 1949.

Graham’s strategy, dubbed the “net current asset value” approach, apparently works very well. One research study, covering the years 1970 through 1983 showed that portfolios picked at the beginning of each year, and held for one year, returned 29.4 percent, on average, over the 13-year period, compared to 11.5 percent for the S&P 500 Index. Other studies of Graham’s strategy produced similar results.

Despite the impressive results, Graham’s net current asset value (NCAV) approach is relatively unknown to individual investors. That’s probably because finding stocks meeting Graham’s requirements requires some digging.

That’s why we dug ourselves into this matter and took this method “for a spin”.

In a normal computation of a company’s book value is defined as " Total Assets minus Total Liabilities"

Ben Graham had a different view about this statement.

Graham’s NCAV strategy calls for buying stocks trading at two-thirds or less of their net current asset value. Or in our screener a NCAV -ratio  > 1,33. ( As we define the ratio as Current Assets / Market Value) This ratio is used to identify those companies that are priced less than their net current assets

The ratios are been sorted in our screener in a descending order. Next, you can also refine the selection by ordering the selection by MF rank , Free Cash flow ,etc..

That’s a stringent requirement, since most companies have negative NCAVs. But Graham was looking for firms trading so cheap that there was little danger of falling further. His strategy calls for selling when a firm’s share price trades up to its NCAV. But of course , one is free to chose the "Margin of Safety. you want or desire...

Go to the Benjamin Graham NCAV Stock Screener

NCAV
Graham concluded that stocks selling below NCAV were worth more dead than alive. Justifying the selling of stock at below NCAV is often done on the basis that a company has no intention of liquidating. Graham stated if a stock was selling below liquidating value, either the price is too low or it should be liquidated. An investor should draw two conclusions from this:

1. At a price below liquidating value, stockholders should question whether it makes sense to continue as a going concern
2. Management should take all steps necessary to correct the gap between market price and intrinsic value (liquidating value) and justify to shareholders their reasons to continue the business

There are no sound reasons for a company to be selling below its liquidation value. For a stock to arrive at a price below NCAV, the company is not likely to have a satisfactory trend in earnings. The risk in purchasing stocks below NCAV is that the assets may be dissipated to a point where the intrinsic value is no longer above the price paid. This does happen but Graham suggested looking for the following potential developments:

1. Creation of an earning power commensurate with the assets caused by a general improvement in the industry or a favorable change in operating policies
2. A sale or merger
3. Complete or partial liquidation

Graham goes on to offer several examples. When buying stocks below NCAV, an investor should lean towards companies with a fairly imminent prospect of the developments listed above. Stocks that have been dissipating assets quickly and so no signs of changing should be avoided.

Graham then states that investment bargains are common stocks that are:

1. selling below liquid asset values or NCAV
2. in no danger of dissipating these assets
3. have formerly shown a large earning power on the market price

Finally, Graham says it better than I ever could:

They are indubitably worth considerably more than they are selling for, and there is a reasonably good chance that this greater worth will sooner or later reflect itself in the market price. At their low price these bargain stocks actually enjoy a high degree of safety, meaning by safety a relatively small risk of principal.