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The Manual of Ideas research team recently jumped into the proverbial stock market "bargain bin" to try to uncover some compelling values. Here is what we found:

Price Does Not Equal Value

Former Columbia professor Benjamin Graham once said, “Price is what you pay; value is what you get.” Many investors agree with this statement – though only outside the investment arena. Few of us would refuse to buy an item in a department store just because it is on sale, yet many do just that when it comes to the stock market. The fear associated with buying a depressed stock, obviously, is that the price decline signifies a fundamental problem. Yet even if the decline has been caused by a decline in intrinsic value, the question is whether the price has declined more than the value erosion warrants. Disciplined investors try to estimate the intrinsic value of companies within their circle of competence and buy them when the price drops far below estimated value.

Graham-Style Value Has Outperformed

Economists Eugene Fama and Ken French have extensively studied the relationship between stock performance and book-to-market ratios. Their seminal paper covered the period from 1963-1990 and included nearly all stocks on the NYSE, Amex and Nasdaq stock markets. The stocks were divided into ten groups (deciles) based on book-to-market and were re-ranked annually. The highest book-to-market stocks outperformed the lowest book-to-market stocks by 21% to 8%, on average, with each descending decile performing worse than the previous. Fama and French also examined the beta of each decile and found that value stocks had lower risk, while growth stocks had the highest risk. The study had a profound impact in part because Fama was a long-time champion of the capital asset pricing model.

Relative Annual Performance of Value versus Growth Stocks, 1928-2008

Source: The Manual of Ideas, Kenneth R. French.

What We Mean By Ben Graham-Style Value

Ben Graham’s favorite approach to valuation was to emphasize the values evident on a company’s balance sheet. Unlike values derived from income statement and cash flow analysis, balance sheet values were deemed “safer” because they depended less on the value of a business as a going concern. If Graham could buy companies for less than the carrying value of their current assets net of all liabilities, he reasoned that he was might be a good deal.

Top 100 Companies Passing Deep Value Screen

The Manual of ideas recently published the results of a screen for companies meeting Ben Graham's criteria of value. Several of the companies on the list have net cash positions that are meaningfully above their recent market value. These ultra-cheap companies include Trident Microsystems (Nasdaq: TRID), PDI (Nasdaq: PDII), Hurray! (Nasdaq: HRAY), Actions Semiconductor (Nasdaq: ACTS), Acorn International (NYSE: ATV), Mattson Technology (Nasdaq: MTSN), ACADIA Pharma (Nasdaq: ACAD), Facet Biotech (Nasdaq: FACT), Soapstone Networks (Nasdaq: SOAP), and Dot Hill Systems (Nasdaq: HILL).

The following are the Top 100 screen results, in alphabetical order:

Disclosure: Long GRVY and HNR. No positions in the other companies mentioned in this article.