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If you are a serious value player, and I was for most of my investment life, you want both net assets and net cash.
Exclude intangibles like goodwill etc. leaving net tangible assets. Divide this figure by the number of issued shares to find NTA per share and look for a share price standing as far below this as you can find. This is one of the classic value ratios, Price/NTA <1.
You'll find that very few big caps ever exhibit this profile of net cash plus P/NTA<1 and almost always it is to be found amongst much smaller companies.
Personally, as well as those two requirements I looked for a good yield to deliver some income whilst waiting for the value to be outed and a low P/E as well. Both those ratios are value indicators at the right level. Use Stockopedia's filtering methods to locate qualifying shares.
Then read the latest accounts and any subsequent news to get an idea of where the company might be heading. This stage is absolutely essential and you need to develop a feel for it. The idea is to find a share which in your opinion has been unfairly valued so cheaply by the market. Not just cos it's a crock and deserves it.
My value criteria were so tight that often I found no candidates but I didn't feel I had to be invested all the time. I just waited until the right one came along. Then bet big. But even the deepest value like this can go wrong,there are are no guarantees even with a long term winning strategy like trading value shares.
This is just the way I played it but almost every value player has their own style and there is no single definition of the game, so that there are numerous combinations of many ratios and facts one could use to find shares.
@Stephen Bland
Thanks for your considered response Stephen. I completely agree that both net cash and net assets are desirable. I mention in another post "cash isn't a position..." that I do invest on a regular basis. I am just not comfortable having cash on the sidelines waiting for a perfect trade. I'd rather be in the market and try and beat the index than only buy the potential hundred baggers.
Perhaps that means I'm not a serious value investor. It's still early on in my investing journey. But it is the Graham-Doddsville school of thought that governs my stock selection. I agree whole heartedly with regard to p/e and p/tb and yield. I bought Royal Mail (RMG) last week on it's low p/e, low p/tb, high yield credentials.
If push came to shove... would you rather invest in a company with net cash or net assets all else being equal?
And do you think I should focus on current net assets, or total net assets when looking for value, again if you had to pick one?
Thanks for your engagement,
All the best,
mario64
(I do not hold CNA.)
Hi Mario. I agree with what Stephen says.
Another way of coming at this is simply to look at debt. Debt is toxic. On the whole it makes sense to avoid companies that have debt that exceeds twice annual profits. I am particularly wary of companies that have increasing levels of debt year on year.
Royal Mail (LON:RMG) has debts of £490 M and a net profit of £95 M. Apart from the debt, the other value indicators look pretty good. It might turn out to be an excellent buy, but it's not something I would buy although I did consider it recently.
Regards, William
@wilkonz
Thanks for contributing William! I'm definitely not saying that I Want a company to be swimming in debt.
But again I have to come back to my questions in the article:
1) is debt-to-cash more or less important than liabilities-to-assets?
2) are long term liabilities and assets more or less important than short term (or "current") liabilities and assets?
Sometimes those ideal "ticks every box" value plays aren't there. (At least not in the large and mid caps as Stephen suggests). But sometimes you have to decide what your priorities are, right? So it's a case of what's your Principle concern... and that's the tricky bit...
Really pleased this thread has got a little traction, I'm really looking to capitalize on the knowledge of longer term members. In all honesty the other posts were click-bait to get people to help me out with this one!
Kind regards,
mario64
As I suggested earlier, each value player will place their own emphasis on the numerous value ratios and facts available, there's no rule about it so you won't receive a single unequivocal answer to your question of whether this or that ratio etc is better or worse than another. It took me a while to narrow my value criteria down.
For me P/NTA<1 was always the most important ratio, if a share didn't have that, it wasn't value. And then you need to read the accounts to identify the nature of the assets. For example a sizeable property holding amongst fixed assets is way preferable to a load of old plant and machinery.
Second most important fact was net cash. Debt is foul stuff that ultimately is nearly always the cause of company demise. The less the better and for a deep value play, I want none.
Like many naive investors, to begin with I thought the more info the better. But it isn't, less is more for value. You don't need to know what the CEO had for breakfast. In fact you barely need to know what the company even does. Value is essentially a numbers method of investing.
I'd add two other essential personal features from what I've seen and from my own experiences. You need to enjoy reading accounts, they have to talk to you. If not, you probably won't make it as a VP. Second, you need extreme patience for the value to out. Just because you are convinced that a share is seriously undervalued on your criteria, doesn't mean that market will agree with you any time soon.
And the third of the two essential features is being a bit of a curmudgeonly git. You don't always fit easily into society's norms even as a kid. You've always been a contrarian in general life as well as investing. You may well ride a motorcycle and found Margaret Thatcher very desirable.
Finally, the best value plays were nearly always contrarian choices condemned by most investors. Negative broker views for example are frequently a positive thing for VPs. Having established what works for you, operate in a vacuum and believe in yourself. It's a lonely game.