Stocks becoming more attractive buys
The market declined 2.43% Friday afternoon, placing it at a 0.55% gain for the year. But as market turmoil strikes, value investors can rejoice because more bargain stocks appear. That was the case this week, when five new stocks joined the Ben Graham net-net screener, after years when discounted stocks were hard to come by.
Markets have declined, but that is good for investors who can now buy at lower prices. Getty
A valuation concept created by the founder of value investing, Ben Graham, a net-net stock is one that is priced below its current assets minus its total liabilities, while neglecting to calculate other assets such as land, equipment and intangible assets. He called this net-net working capital. Mathematically, his formula looks like this:
Net-net working capital (NNWC) = cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) — total liabilities
Graham developed the method to buy stocks for less than their liquidation value, and he usually held many. In his seminal book, “The Intelligent Investor,” he wrote:
“The idea here was to acquire as many issues as possible at a cost for each of less than their book value in terms of net-current-assets alone – i.e., giving no value to the plant account and other assets. Our purchases were made typically at two-thirds or less of such stripped-down asset value. In most years we carried a wide diversification here – at least 100 different issues.”
Stocks that meet these criteria tend to perform well. One study found that over one 13-year period, they returned 29.4% on average, compared to a 11.5% rise in the S&P 500.
Typically, they are hard to find in perpetually bull markets. But more are appearing as markets sink.
