Seven stocks showing deep value on a Benjamin Graham NCAV Screen

Friday, Oct 28 2011 by
Seven stocks showing deep value on a Benjamin Graham NCAV Screen

For investors keen to identify the ultimate value stocks, there is no shortage of investment philosophy and advice to put to the test – and among the most famous are the models formulated by the father of Value Investing - Benjamin Graham. With an approach that emerged from the grim days of the Great Depression, Graham’s techniques have gone on to become a vital tool for value hunters. Within his earliest work, Graham came up with a stringent value test that assesses a company based on the value of its current assets minus its total liabilities. It is a demanding screen to pass especially when market valuations are high, but research has shown that Net Current Asset Value – or NCAV stocks as they are known – offer investors significant potential gains.

Graham and his now legendary books, ‘Security Analysis’ and ‘The Intelligent Investor’ are firmly embedded in the foundations of conventional investment theory. For anyone that isn’t familiar with him, it is worth referring to the views of an equally high profile value investor for guidance – Warren Buffett – who credited his professor for shaping his well known and hugely successful investment philosophy:

Graham began penning his investment philosophy with the publication of Security Analysis in 1934, which was followed by the more accessible guide The Intelligent Investor in 1949. In The Intelligent Investor, Graham sets out two detailed screens for potential investors, one for “Defensive Investors” and another more demanding test for “Enterprising Investors”. As the original ‘quant’ on Wall Street, he aimed to invest purely on the basis of the undervaluation of bargain stocks, seeking safety from individual bankruptcy risk by diversifying his portfolio with a large numbers of companies – he suggested 30. While his legacy has tended to be dominated by his later work, the earlier formulas, in particular NCAV, remains a vital tool in identifying these undervalued stocks.

NCAV for deep value

NCAV is a deep value screen that values a company based on its Current Assets – think cash and cash equivalents, money it is owed and inventories – minus its Total Liabilities. The essence of the model is to identify bargain stocks that are trading at such a low price that they are unlikely to slip further. In the worst case, you would be able to liquidate the company and still emerge with a gain. To add even more comfort, Graham built in a 33% margin of safety, so in his basket of undervalued stocks he would only buy companies that were trading under 66% of their NCAV.

As an aside, Graham developed an extension of this screen, commonly known as Net Net Working Capital, which assumed that in the event of a liquidation an investor was not guaranteed a 100% return on liquid assets. So he made allowances for that. No surprises that this screen is an even more demanding test for bargain stocks.

But does NCAV work for UK stocks, you might ask? In a fascinating 2007 research paper, Ying Xiao and Glen Arnold at the Centre for Economics and Finance Research at Salford Business School, found that between 1981 and 2005 London-listed stocks with a Market Cap / NCAV ratio of less than 0.66 displayed “annualised return[s] up to 19.7% per year over five holding years”.

Despite the formula being comparatively straightforward, the task of applying it to come up with a basket of stocks is not easy because so many companies fail the test. However, using the screening products soon to launch with Stockopedia Premium, we have done the maths. Among those on the list is Ceres Power (LON:CWR), an AIM listed fuel cell technology company with plans to introduce a mass market domestic combined-heat-and-power boiler that will not only heat your home but also generate electricity that you can sell back to the grid. With a market cap of £14.6 million, Ceres boasts net current assets of £24.6 million, giving it a price-to-NCAV score of just 0.59. Its cash position was bolstered two years ago with a £31.4 million share placing but hopes of introducing the new product this year were postponed following problematic trials and the subsequent departure of its CEO. Nevertheless, a full launch is expected in the first half of 2014 but the company has said it is planning to raise more cash before then. This raises questions about how quickly it will be burning through its cashpile but on current numbers at least, it’s an NCAV stock.

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House-builders have been a common occurrence on bargain stock screens since the economic downturn began wreaking havoc in British mortgage lending. On Graham’s NCAV screen Barratt Developments (LON:BDEV) and Telford Homes (LON:TEF) are the two main contenders, with peer group companies Bovis Homes (LON:BVS), Bellway (LON:BWY) and Taylor Wimpey (LON:TW.) falling just short of the stricter criteria. With net assets of £2.93bn and a market cap of £850 million, FTSE 250 quoted Barratt easily earns a place on the NCAV screen with a score of 0.55. Shares in the company have traded within a relatively narrow range of between 76p and 119p for the last 12 months – well down on the three year high of 184p in September 2009 and just a fraction of the 720p peak they hit in January 2007. Like its peers, Barratt has focused on optimising selling prices, improving efficiencies and building its land bank. Supply/demand trends for new homes appear to favour house-builders in the long term – but the underlying mortgage market needs to be repaired first.

Next, is MBL (LON:MUBL), which until recently ran a very successful music and DVD distribution business. Last year a key customer, the supermarket group Wm Morrison, caused chaos by cancelling its contract with the group, which in turn triggered a very rapid disintegration of the bulk of MBL’s operations. Between 2010 and 2011 the groups net assets were slashed from £35.9 million to £13.6 million, but with a tiny market cap of £1.9 million, the company comes near the top of Graham’s screen with an NCAV of 0.19. MBL hasn’t ruled out further divestments as it seeks to stabilise its remaining operations. CEO Trevor Allan has stressed that the company is committed to recovering and to be fair the MBL board was apparently making efforts to diversify shortly before last year’s disastrous events.

Elsewhere, Bluestar Secutech (LON:BSST), the Chinese security surveillance business, produced a second successive year of increased revenues and profits in 2011 on the back of increasing demand from the banking and government security markets. With net assets of £24.4 million and a market cap of £12.5 million, BlueStar scores a price-to-NCAV of 0.56. Closer inspection reveals that within the company’s £29.6 million of current assets, £21.3 million is attributable to trade and other receivables – in other words, money that the company is owed. BlueStar has conceded as much – claiming that despite many of its customers being banks, it normally takes it many months to get paid. It is a similar story at another Chinese business software company, Geong (LON:GNG) which, with net assets of £17.9 million and a market cap of £7.89 million, has an NCAV of 0.48. Pre-tax profits and margins improved substantially last year at GEONG as the implementation of a software-as-a-service model took effect. Total current assets came in at £23.2 million, within which trade and other receivables totalled £4.8 million and accrued income – amounts due from customers on the achievement of milestones but not yet invoiced until completion of the project – totalled £11.4 million. High Accounts receivable (or cash not received from sales) can be a red flag on company accounts, and combining that with the opaqueness of foreign listed AIM stocks accounts can make the risk in these stocks high.

Meanwhile, June 27 turned out to be one of the hottest days of 2011 in the UK, adding insult to injury for shareholders of solar panel component maker PV Crystalox (LON:PVCS), which saw its share price halve in value on the same day. Huge concern about demand in the photovoltaic market led PV to issue a warning that if conditions persisted it could be forced into a second half loss. With £95.6 million of net assets and a market cap of £32.3 million, PV Crystalox scores a price-to-NCAV of 0.45. Despite having stripped down costs, increased shipments and significantly boosted profits, the company continues to be unsettled by issues over demand and major pricing pressures in the market.

Finally, American oilman Steve Remp has been a regular fixture on the Alternative Investment Market for several years, bringing joy and heartbreak to investors in Ramco Energy and later turning his attention to renewable energy. His near legendary deal making ability saw SeaEnergy (LON:SEA) pick up acreage in a government-led offshore wind development auction in early 2010. He then sold that arm of the company to Repsol in June this year for £38 million. With a focus on renewable energy services, a 24.68% interest in Lansdowne Oil & Gas (LON:LOGP) and other potential exploration projects, SeaEnergy is a speculative prospect. With net assets of £28.5 million and a market cap of £16.9 million, the company scores 0.77 on the NCAV list, just outside Graham’s strict criteria – but justifies its place as a stock for the oil & gas investment crowd.

So house-builders, speculative energy stocks and Chinese AIM stocks - NCAV investing is certainly not for the faint-hearted but when investing in a portfolio of NCAV stocks, it seems that the benefits on average tend to outweigh the occasional disaster. In the words of the great man himself, NCAVs are “selling at a price well below the value of the enterprise as a private business. No proprietor or majority holder would think of selling what he owned at so ridiculously low a figure.” Still, anybody investing in such issues must be extremely careful that they don’t expose themselves to stock specific risks as the risk of complete loss of capital in an individual stock is so high. Graham himself recommended a diversified portfolio of at least 30 of such issues, which is counsel that all but the most foolhardy would be wise to listen to.


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Ceres Power Holdings Plc is a United-Kingdom based energy company. The Company is engaged in development of low cost, next generation fuel cell technology. The Company’s operating segment includes the development and commercialization of its fuel cell technology The Company’s key product is Steel Cell Technology which is used to converts fuel directly into electrical power. The Company’s subsidiaries include Ceres Power Limited-development and commercialization of the fuel cell technology; Ceres Intellectual Property Company- administration of registered intellectual property developed within the Group, and Ceres Power Intermediate Holdings Limited- holding company to the other Group companies and to manage the cash, cash equivalents and short term investments. more »

Share Price (AIM)
-0.3  -2.8%
P/E (fwd)
Yield (fwd)
Mkt Cap (£m)

Barratt Developments PLC is a United Kingdom-based holding company. The Company and its subsidiaries’ principal activities consists of acquiring and developing land, planning, designing and constructing residential property developments and selling the homes it builds throughout Britain. The Company operates in two segments: house building and commercial developments. The Company’s brands include Barratt Homes, David Wilson Homes, Barratt London, Ward Homes and Wilson Bowden Developments. Barratt Homes is a house building brand in Britain, which focuses on traditional housing, apartments and urban regeneration. David Wilson Homes constructs family homes. Barratt London is a residential developer in London. Ward Homes operates in Kent and the South East. Wilson Bowden Developments is a commercial property development business focused on retail, leisure, office, industrial and mixed-use schemes. It operates across England, Scotland and Wales. more »

Share Price (Full)
-3.0  -0.6%
P/E (fwd)
Yield (fwd)
Mkt Cap (£m)

Telford Homes Plc (Telford Homes) is engaged in property development. As of March 31, 2012, the Company had 2,000 properties in the development pipeline and these properties need to be managed through the planning process, in design and during construction. In order to control this process Telford Homes is organized into two operating divisions: Alto and Metro. During the fiscal year ended March 31, 2012, the Company had completed 542 affordable homes. As of March 31, 2012, the Company had 2,000 properties in the pipeline. Telford Homes’s subsidiaries include Telford Homes (Romford) Limited, Telford Homes (Properties) Limited, Telford Homes Contracting Limited, Telford Homes (Investments) Limited and Telford Homes (Creekside) Limited. more »

Share Price (AIM)
2.0  0.5%
P/E (fwd)
Yield (fwd)
Mkt Cap (£m)

  Is Ceres Power Holdings fundamentally strong or weak? Find out More »

13 Comments on this Article show/hide all

nicole 28th Oct '11 1 of 13

Beddard at iii has been harping on about this stuff too - though he's focused on a tiddler Airea.

Wouldn't trust those Chinese ones.

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marben100 29th Oct '11 2 of 13

As it happens, I know quite a bit about Ceres Power (LON:CWR) and MBL (LON:MUBL)

Ceres is buring through about £14m p.a. and says in it's prelims:

The Board anticipates that the Group will raise an initial tranche of funding during the next 12 months to continue the development, testing and trialing of the mains gas residential CHP product as set out in the Chairman's Statement.

Unfortunately, that makes it too speculative for me to invest in at present, as there is no telling what share price it will be able to raise funds at. I can even envisage that it might be bought out at a low price (e.g. by Centrica, who are already a large shareholder).

Having attended MBL's AGM recently, I can tell you that the chairman stated that the reported net current assets as at end of year are not a reflection of the current position and significant writedowns will be taken. That too makes it somewhat speculative (though less so that Ceres). Given the loss of its major customer, MBL's future is somewhat uncertain but management would have to work hard to destroy more value than already has been.

If you study Graham's work you will find that this screen is very much one element of his stock selection  process. There are many other more complex criteria that a stock would have to meet to qualify. One of his criteria for identiying a "defensive stock" is that "each company selected should be large, prominent and conservatively financed."


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ExpectingValue 29th Oct '11 3 of 13

Chiming in too, as Barratt are in my portfolio.

I think housebuilders fit into this screen by a rather fine wording choice; with land and work in progress classed as 'inventories', this shows up on NCAV. While I don't object to that, it does mean analysis like this - which uses NCAV as a proxy for fairly liquid assets - doesn't really suit housebuilders. When we think of inventories, it usually takes the form of stock in a shop or something similar that can be sold and wound down on fairly short notice.

Barratt's £3bn land bank is probably far less liquid than the fixed assets of most other, smaller companies.

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shade 31st Oct '11 4 of 13

Just to add a few points which haven't been said so far:

1. Most if not all of the stocks listed aren't making a profit, or worse, have consistently making losses for the past couple of years.

2. Pretty gloomy for MBL. Digital delivery is where it's at right now. Traditional wholesalers will be struggling as more and more physical sales are losing to digital/internet streaming. Just look at HMV and GAME. Unless they come up with wholesale rights to distribute and stream movies online, I wouldn't invest in them.

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Murakami 31st Oct '11 5 of 13

In reply to ExpectingValue, post #3

Good comments, thanks. Re Graham's full Defensive and Enterprising Investor criteria, we've modelled those out now in full as part of Stockopedia Premium. At the moment, there's only one company on the UK market qualifiying under Graham's Defensive criteria (a stock which incidentally fails on a pure NCAV basis) and none at all qualifying under the Enteprising criteria (see details here).

However, the point of the piece above was to focus on the results of what might be called a single criterion "naive NCAV" screen. The UK research referred to above just used this approach with no additional filtering criteria and generated an annualised return of up to 19.7% per year over five years. The paper is well worth a read.

That's not to say that a more nuanced NCAV strategy with additional filters, which, for example, took account of the lack of liquidity in (housebuilding) inventories or the level of cashburn couldn't do even better than this. It probably would. But c. 20% a year compounding seems pretty respectable for a mechanical strategy, of course assuming it can continue to be replicated in an out of sample period.

However, it is certainly true that the NCAV approach tends to be a "hold your nose and buy" strategy which is not for the faint-hearted...

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marben100 1st Nov '11 6 of 13

In reply to Murakami, post #5

Hi "Murakami",

I wholly support Stockopedia's efforts to provide powerful screening tools. They are a useful "first step" in finding companies that might merit further investigation. However, when you say


But c. 20% a year compounding seems pretty respectable for a mechanical strategy


I must refer you to Jason Zweig's commentary on Chapter 1 of The Intelligent Investor: (Revised edition 2006), in relation to a number of mechanical investing techniques:

...Each of these so-called investing approaches fell prey to Graham's law: All mechanical formulae for earning higher stock performance are "a kind of self-destructive process - akin to the law of diminishing returns...

Graham deprecates mechanical investing techniques (you need to read the chapter and commentary to fully understand exactly why). And his pronouncements exactly match my own experience over a long period. I even tried a semi-mechanical approach (based on a group of investors voting for value stocks) on part of my own portfolio over a four year period. Back testing over the previous 5 years (2002-7) showed that the approach I had selected should yield great results. Unfortuantely, as Graham suggests, back-testing proves little. In the subsequent four years, this approach significantly underperformed the rest of my portfolio. Here is my explanation of the strategy: and here is my final article on the results: 

Note also this comment from Zweig, which also matches my own experience and views:

Graham's definition of investing could not be clearer: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return". note that investment, acording to graham, consists of three elements:

  • you must thoroughly analyse a company, and the soundness of its underlying business, before you buy its stock;
  • you must deliberately protect yourself against serious losses;
  • you must aspire to "adequate", not extraordinary, performance.

Proper investment, as opposed to speculation, requires hard work. There are no short cuts.



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valuer 1st Nov '11 7 of 13

In reply to marben100, post #6

It seems your mechanical strategy relied on a consensus vote of a group of investors. Isn't the point of contrarian value investing that you shouldn't be investing according to consensus viewpoints? Not sure that your example best illustrates that mechanical investing strategies don't work - perhaps it shows that social investing strategies don't. I know of many successful strategies and rich men that have benefited from mechanical 'quant' investment strategies - although they were certainly more diversified than the Graham one mentioned.

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marben100 1st Nov '11 8 of 13

In reply to valuer, post #7

Hi valuer,

Isn't the point of contrarian value investing that you shouldn't be investing according to consensus viewpoints?


In this case, however, the group was one of contrarians! There selections were intended to be of unpopular stocks, that the investing "herd" (very different from the group) hated. The fallacy, however, was that too many placed too much reliance on simply looking at the figures. This led to repeated selection of RBS, which on simple value metrics looked "cheap". The reality, however, was that the raw figures couldn't be trusted - as we now know. Zweig cites several examples of mechanical strategies that appeared to work... until they didn't, including : "Cash in on the calendar", "What Works on Wall Street", "The Foolish Four" (promoted by TMF USA). The simple fact is that if any mechanical strategy worked reliably, it would become widely used, resulting in market disturbance that defeated the strategy!

The reason I posted was that I feel sure that the idea of having some of his principles applied to a mechanical strategy would have Graham spinning in his grave. If you study his work carefully, you will find that his emphasis on "thorough analysis" (which doesn't just mean looking at a few figures) is the key message he is trying to "sell", alongside the need to forma reasonable valuation metric for a stock and then buying it when it appears cheap vs that metric and selling when it doesn't. That is the philosophy I (try to! - it's easier said than done) apply to my own investing. You will also find that Graham suggested using quality managed funds for those that don't have the time (or inclination) to do their own "thorough analysis". As you read further in his works, you will find that Graham's through analysis includes a careful study of the company's history, to help you judge the likely trajectory of its earnings and balance sheet. I hope and expect that Pro tools will help with this (but it would be wise to go back to source to check any key figures - and, as Graham advocates, to investigate any accounting adjustments that have been made.


I applaud Stockopedia for their efforts on these screens (c'mon guys, let's have the beta, at last!). However, users must be aware that it is not wise to rely on them solely. Rather you should use screens to find possible companies that fit your investing criteria - and then study those companies closely to see whether there are qualitative issues that make those companies less (or more!) undervalued than they seem at first glance - and whether or not they are genuinely safe investments (i.e. unlikely to go bust or be taken over/bought out at a price below what you're paying).



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marben100 1st Nov '11 9 of 13

PS quant strategies are also mentioned in the book . Graham acknowledges that they can work - but they are far more sophisticated than the type of mechanical strategies we're talking about here. Moreover, they're trading strategies, not investments. I actually use one I've developed myself for my trading activities and it has produced small but pretty consistent profits for the last 4 years - but they're pretty different to the types of tool we're talking about here, based on stock screeners. Most quant strategies are forms of arbitraging, capitalising on small market anomalies and statistical methods. My own strategy works because it focusses on a very small niche that is too small for the hedgies to bother with. Such strategies are also likely to require access to far more resources than the typical investor reading these boards will have access to (though my own is relatively simple).

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Crusty 6th Nov '11 10 of 13

This method seems to detect value destroyers par excellence. More a list of companies to avoid I would have thought. Ceres - yet to prove their system works, let alone profitably. MUBL - distribution model shot to pieces by the net. Housebuilders - asset value could crumble as prices come up against affordability. Chinese companies ....smell, it's awful. This guy may be very clever, but it sure doesn't look like it from where I stand.

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Edward Croft 12th Mar '12 12 of 13

In reply to ExpectingValue, post #3

I think its pretty phenomenal how our Ben Graham bargain screen stocks have been performing in recent months and time to resurrect this thread. Since early December the Net Nets and NCAV selections have almost doubled the market return across broadly diversified portfolios. In the last month alone - the net net list has gained almost 9% and its up over 22% overall vs 11% for the market.

As if to prove the point that we should beware our inherent qualitative biases against the kinds of stocks that come up on these lists Barratt Developments (LON:BDEV) and Telford Homes (LON:TEF) have absolutely rocketed ever since. Barratt is up from 80p to over £1.40 and Telford Homes up from 65p to over £1 - its interesting that these stocks were among those that were highlighted as being substantively misplaced as buys in the original article.

Even Greenblatt of Magic Formula fame has written recently about being careful not to overly weight one's own opinions when selecting stocks. He has found many complaining that the Magic Formula just doesn't perform for individual accounts. The truth is that people have been selecting the wrong stocks from the lists. It's regularly the most surprising and unpopular selections that do the very best - which is kind of the whole point - you just can't beat the market by taking an opinion that the consensus agrees with !

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Edward Croft 15th Mar '12 13 of 13

In reply to marben100, post #9

Mark, Just thought I'd reflect how well the net-net bargain basket of stocks has been performing in recent months. Up an astonishing 34% since early December and leading our set of screens in this rally.

Granted some of the outperformance is due to sub £10m microcap companies, but it does tally with your thoughts on capitalising on very small niches that are too small for hedge funds to bother with. The thing with net nets is individually they are enormously risky, but as a basket and in the right circumstances they can perform extremely well as essentially you are buying a set of assets that is priced at less than a worst case liquidation value.

For anyone interested in the longer term history of Net Nets there's some good backtesting on Old School Value for the US Market -

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