Benjamin Graham was an economist and professional investor who taught Warren Buffett, Irving Kahn, Walter J. Schloss and other famous investors at Columbia Business School. Buffett, who credits Graham with grounding him with a sound intellectual investment framework, describes Graham as the second most influential person in his life after his own father. In the preface to Graham's book, "The Intelligent Investor," Buffett calls it "by far the best book about investing ever written."
Graham taught that the returns an investor was to expect were not proportional to the risk he was willing to assume but rather to the effort he was willing to put into the selection and maintenance of his stock portfolio. He recommended 3 different grades of stocks based on increasing returns - Defensive, Enterprising and NCAV (Net Current Asset Value) stocks. The Comprehensive Graham Screener checks 4700 NYSE and NASDAQ stocks to find stocks meeting Graham's criteria.
Earlier we saw 10 Stocks Meeting Graham's Defensive Criteria In 2013. Then we saw 5 Stocks Meeting Graham's Enterprising Criteria. Today, we will look at 10 stocks that meet Graham's NCAV grade criteria and additionally, have the most stable earnings histories of the ones that do so.
Graham himself was a great believer in NCAV stocks and wrote:
"A good part of our own operations on Wall Street had been concentrated on the purchase of bargain issues easily identified as such by the fact that they were selling at less than their share in the net current assets (working capital) alone, not counting the plant account and other assets, and after deducting all liabilities ahead of the stock. It is clear that these issues were 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."
The Bargain Issue, or Net-Current-Asset Stock, Grade Criteria:
Graham recommended NCAV grade stocks for investors who wanted more profits than defensive investors and were willing to put in more effort into the creation and maintenance of their portfolios. The definition that Graham specified for identifying NCAV stocks were as follows:
Summarized from Chapter 15 of The Intelligent Investor - Stock Selection for the Enterprising Investor:
"It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone-after deducting all prior claims, and counting as zero the fixed and other assets- the results should be quite satisfactory. They were so, in our experience, for more than 30 years"
A few lines later, he provides one additional criteria to be considered in the selection of NCAV stocks:
"...eliminated those which had reported net losses in the last 12-month period."
NCAV Stocks for 2013:
Applying Graham's 16 criteria to 4700 NYSE and NASDAQ stocks gives about 30 companies that meet Graham's NCAV criteria today. Given here are the first 10.
Tangible Book Value
ADDvantage Technologies Group Inc
Lihua International Inc
Xinyuan Real Estate Co Ltd
Cobra Electronics Corp
Trans World Entertainment Corp
Alco Stores Inc
eOn Communications Corp
The NCAV Price shown here is calculated by deducting total liabilities from current assets (per share). All stocks shown here also have positive earnings in the last 12 month period, thus completely meeting Graham's criteria for NCAV stocks.
In fact, AEY has no earnings deficit in the last 10 years which actually makes it meet Graham's defensive criteria for earnings stability. LIWA has had interrupted positive earnings for the last 6 years and XIN, for the last 4 years.
Graham's definition of a large company for defensive investment in 1973 was $100 million in annual sales. That works out to about $500 million today, considering the difference in CPI from 1973. While this is not a required criteria for NCAV stocks, LIWA, XIN, XRTX and BAMM all exceed $500 million in sales. TWMC and ALCS exceed $450 Million. COBR exceeds $100 million. In fact, of the companies on this list, the only ones that have under $100 million in annual sales are AEY (35.22), MAXY (30.01) and EONC (22.5).
NCAV stocks are the reason for the myth that Graham recommended cheap stocks. As has been already seen, Graham's Defensive and Enterprising criteria are very elaborate and designed to verify all qualitative and quantitative aspects of a stock. The NCAV criteria themselves are not as simplistic as popularly believed. They require sufficient excess of cash equivalents over liabilities, as well as positive earnings, for the stock to qualify as an NCAV stock.
In fact, according to Graham, NCAV stocks are among the most profitable stocks, and as mentioned above, he himself followed the approach quite extensively for more than 3 decades. But do note that the Graham evaluation of a stock changes every day in accordance with price and financial data changes. Please refer to Serenity's stock screeners to see the latest list of stocks meeting Graham's criteria.