Over 50 years ago Benjamin Graham, the father of value investing, began to utilized a measurement of a companies worth known as net current asset value. NCAV is value investing at its purest.
You are probably familiar with the measurement known as book value which is total asset minus total liabilities. But NCAV is slightly different. NCAV equals the companies current assets minus its total liabilities. For example:
OHB (Orleans Homebuilders) has the following items entered on its Q2 financial statements:
Current Assets = 3463.34
Total Liabilities = 2555.12
Total Common Shares Outstanding = 39.21
So the NCAV of OHB is 3463.34-2555.12 = 908.22
This number can then be converted into the more useful NCAV per share by dividing the NCAV by total common shares outstanding. Therefore, the NCAV per share is 908.22 / 39.21 = 23.16. At this point the NCAV per share could be compared to the market value of the shares to determine if the stock is trading at a fair value.
You might be wondering why it is recommended one uses NCAV as opposed to book value. The reason is simple- margin of safety. By using the NCAV you are essentially paying nothing for all the fixed assets- buildings, machinery, etc., or any goodwill items that may exist. As long as the company has a reasonable amount of financial strength (stay tuned for my next post covering this and other important details in value stock selection) it does not matter how the current earnings results are because you are paying so little for it.
The general recommendation for the use of NCAV in practical investing is to buy issues that are selling at only 66% or less of NCAV. It is my opinion that is far to rigid and up to 100% NCAV should be allowed for special circumstances.
Finding sub-NCAV stocks can be a very challenging and even impossible task, especially in a bull market. But in a bear market you will find that it is not all to uncommon for a stock to trade within our NACV requirements. There are many methods for finding these under priced issues. Some like to do a screen to narrow down the options to stocks most likely meet their requirements. Others just prefer to go through balance sheets by hand. My favorite is to visit http://www.grahaminvestor.com/screens/grahams_result which shows a list of all stocks currently trading below or near their NCAV. Of course this list contains many companies that would not be sound buys due to the fact that they may have insufficient financial strength to meet future road blocks. That is why I will be setting up a section of this blog dedicated to taking this list and pruning out the weaker companies, leaving only the most financially sound companies. This list will be updated weekly so you may want to check up on it every once in a while to see if any new value stocks have been added.
Well, that's about it for today, but I'll leave you with one final statement that is essential to any investor wishing to purchase NCAV stocks. That is- Do not be afraid. Do not be taken over by the pessimism of wall street that usually brings stocks to these levels. Remember that all bear markets pass, no matter how severe they may seem.
You are probably familiar with the measurement known as book value which is total asset minus total liabilities. But NCAV is slightly different. NCAV equals the companies current assets minus its total liabilities. For example:
OHB (Orleans Homebuilders) has the following items entered on its Q2 financial statements:
Current Assets = 3463.34
Total Liabilities = 2555.12
Total Common Shares Outstanding = 39.21
So the NCAV of OHB is 3463.34-2555.12 = 908.22
This number can then be converted into the more useful NCAV per share by dividing the NCAV by total common shares outstanding. Therefore, the NCAV per share is 908.22 / 39.21 = 23.16. At this point the NCAV per share could be compared to the market value of the shares to determine if the stock is trading at a fair value.
You might be wondering why it is recommended one uses NCAV as opposed to book value. The reason is simple- margin of safety. By using the NCAV you are essentially paying nothing for all the fixed assets- buildings, machinery, etc., or any goodwill items that may exist. As long as the company has a reasonable amount of financial strength (stay tuned for my next post covering this and other important details in value stock selection) it does not matter how the current earnings results are because you are paying so little for it.
The general recommendation for the use of NCAV in practical investing is to buy issues that are selling at only 66% or less of NCAV. It is my opinion that is far to rigid and up to 100% NCAV should be allowed for special circumstances.
Finding sub-NCAV stocks can be a very challenging and even impossible task, especially in a bull market. But in a bear market you will find that it is not all to uncommon for a stock to trade within our NACV requirements. There are many methods for finding these under priced issues. Some like to do a screen to narrow down the options to stocks most likely meet their requirements. Others just prefer to go through balance sheets by hand. My favorite is to visit http://www.grahaminvestor.com/screens/grahams_result which shows a list of all stocks currently trading below or near their NCAV. Of course this list contains many companies that would not be sound buys due to the fact that they may have insufficient financial strength to meet future road blocks. That is why I will be setting up a section of this blog dedicated to taking this list and pruning out the weaker companies, leaving only the most financially sound companies. This list will be updated weekly so you may want to check up on it every once in a while to see if any new value stocks have been added.
Well, that's about it for today, but I'll leave you with one final statement that is essential to any investor wishing to purchase NCAV stocks. That is- Do not be afraid. Do not be taken over by the pessimism of wall street that usually brings stocks to these levels. Remember that all bear markets pass, no matter how severe they may seem.
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