One of Ben Graham’s favorite techniques was to buy stocks that traded less than net current assets and sell them when they appreciated above that level.
Current assets are simply all the current assets on a company’s books that can be quickly converted to cash. To find net current assets, you simply subtract all liabilities from that number. If a stock could be purchased at a discount to this number, it was considered a bargain issue and purchased for the portfolio.
As a note, no value was assigned to any real estate, equipment or other property owned by the company. Graham reported solid results using this approach and later research from investment firm Tweedy Browne and others confirmed that this is a solid strategy for high returns.
I recently ran across a new book on the subject: The Net Current Asset Value Approach to Investing, written by a gentleman named Victor Wendl. The St. Louis resident updated such studies and investigated the performance of net current asset stocks from 1950 to 2009 using the Compustat database.
The result: It remains a wildly successful long-term strategy.
He found that over the 60-year period, stocks that could be purchased for 75% or less of net current assets returned 19.9% annually compared to a 10.7% return for the broader market. More impressively, in the lost decade of 2000 to 2009 — one of the worst decades ever for the stock market — net current assets stocks returned more than 29% a year on average.
Net current asset stocks have long been a part of my investment approach and I have a simple policy: If I can find them, I buy them. After the extended advance in the market there are not a lot of these gems around. Still, a few can be found if you look closely.
One such example: Stanley Furniture (STLY). Business is not exactly booming at Stanley Furniture, but the stock is holding its own in a difficult market. The company makes furniture for upper-end consumers and has struggled along with the economy.
Recently, Stanley has undergone a makeover focusing on relocating offices, combining showrooms and introducing new product lines to spur future growth. In the meantime, the shares sell for only 84% of net current asset value, and were cheaper before today’s 4% pop. This is a well-known furniture brand trading at a huge discount its asset value and should be purchased by long-term value investors.
Gencor Industries (GENC) is not as well-known, but it’s an interesting company trading at a very cheap price. Gencor makes asphalt plants, spoil remediation plamts and screening system for the highway and road construction industry.
Business has been weak as the a Federal Government delays infrastructure spending and state are diverting money away from highway repair and construction for economic reasons. If you do much driving, though, you know it’s only a matter of time before this has to change … and companies like Gencor thus see a marked improvement in business condition.
In the meantime, the company sells for just 73% of net current asset and has more cash on the books that the current market value of the entire company. This is a super cheap stock with the potential to be a growth leader when we start spending money to fix our aging transportation infrastructure.
The bottom line: Buying stocks for less than their net current asset value has worked for many decades now. There’s no reason to think it will not continue to do so.
As of this writing, Tim Melvin was long GENC and STLY.
