This is my first post, so please be gentle with me.
I thought I would put down some of my thoughts on some deep value situations: “Net Nets". Hopefully it could become a discussion point for anyone interested or who has experience in investing in net-nets.
Benjamin Graham first espoused his net current assets value (NCAV) rule for security selection in the 1934 edition of Security Analysis. For more info please see the excellent Stockopedia screen on this under the Bargain Stocks tab: Benjamin Graham NCAV Bargain Screen.
The investment rationale is summed up neatly by Carlisle et al [2010] "Graham proposed that investors purchase stocks trading at a discount to NCAV because the NCAV represented “a rough measure of liquidating value" and “there can be no sound reason for a stock's selling continuously below its liquidating value" (Graham and Dodd [1934]). According to Graham, it meant the stock was “too cheap, and therefore offered an attractive medium for purchase." In layman's terms if you were to liquidate (sell) the company: cash on
the balance sheet is worth £1 in £1, inventories are marked down
slightly and fixed assets are marked down more – eg who wants your 3
year old office PC even at written down book value? Once all the assets are added up and the debt and
pension obligations taken away there is a positive value which is in
excess of the stockmarket value (aka market Cap) of the company. You
really are buying a £1 at a discount.
Graham applied his NCAV rule in the operations of his investment company, Graham - Newman Corporation, through the period 1930 to 1956. He reported that stocks selected on the basis of the rule earned, on average, around 20 per cent per year (Oppenheimer [1986]).
In the intervening years there been a number of academic studies of net asset value investing, including Oppenheimer [1986] and Carlisle, Mohanty and Oxman [2010]. All find that the returns to NCAV investing exceed those of passive investing, and by some margin. Carlisle et al conducted a study in assessing Net Current Asset (aka Net-Nets) investing between December 83 and December 2008. They found the "mean monthly return was 2.55%. This compares to the mainland to return the NYSE AMEX and small firm indices of 0.85% and 1.24% respectively".
It would appear therefore…
