I’m cheap.
That’s what my wife says. I like to say I’m looking for “value”, but to her, I’ll be forever cheap.
At least, I’m in good company because Ben Graham was cheap.
He wanted to buy stocks left for dead and selling at a discount to its asset values.
He called these types of stocks, “net nets”. Companies that sell for less than it’s net current asset value, or the version that I focus on today, net net working capital.
What is Net Net Working Capital?
It’s the lowest form of valuation you could possibly do because it ignores everything about the business and just focuses on tangible assets.
Net Net Working Capital =
Cash and short-term investments
+ (0.75 x accounts receivable)
+ (0.5 x inventory)
– total liabilities
This is a very conservative form of valuation.
A company that trades at or below NNWC is under some serious pressure and trouble.
To put it bluntly, the business sucks.
That’s why the business operations are completely ignored.
There are obviously things you still need to consider when analyzing a net net.
For a fuller explanation, check out the post on the blog discussing NNWC and how to research them.
But it Worked in the 1920’s and Still Works Today
Need proof?
Net net stocks have killed the market.
Check out the screener and the backtest I performed.
From 2000 to 2012, it’s earned an annualized return of 18.28% vs 1.57% for the S&P500 and 5.31% for the Russell2000.
It’s not for the faint hearted because there is a lot of volatility and you need to buy micro or small caps.
But for the fearless and the “cheap”, this may be just your style.
