Back-Testing Graham NCAV, NNWC Screen Strategies

by: Jae Jun

Over the past year, I’ve focused mainly on cheap, ugly, beaten down stocks. My 2009 performance exceeded any expectation and confirmed that stocks trading at near floor levels with the downside well protected outperformed everything in a rising market.

Over the next few weeks, I’ll be going through other strategies and backtesting them to see how it would have worked. You could have the best tools in your belt, but in the end, picking the right stocks is what it’s all about.

Graham NCAV & NNWC Screen Strategies

Here, I’ve backtested the basic strategy of screening for NCAV and NNWC and the results are quite surprising. Financial stocks have been filtered out and the Graham NNWC screener will now reflect the results you are about to see.

In this test, I’ve compiled two sets of data. A portfolio that consists of 15 stocks and another more concentrated portfolio of 10 stocks. Both strategies are based on rebalancing the portfolio every 4 weeks.

Screen Descriptions

1. Net Current Asset Value ((NCAV))

NCAV is greater than market cap.

2. Net Net Working Capital (NNWC)

NNWC is greater than market cap. (Don’t forget to download the free NNWC valuation spreadsheet.)

3. NNWC Increasing

NNWC is positive and the latest NNWC has increased compared to the previous quarter. In this screen, NNWC doesn’t have to be less than current market price. Since the requirement is that NNWC is greater than 0, most large caps automatically fail to make the cut due to the large quantity of intangibles, goodwill and total debt.

4. S&P500

S&P500 market index e.g. S&P500 ETF (NYSEARCA:SPY)

Graham NCAV NNWC Screen Performance – 15 Stocks

Click images to enlarge

Assuming you rebalanced your portfolio with the top 15 stocks from the screen every 4 weeks for the past 3 years, $100 would now be worth the following based on each of the strategies.

  • NCAV: $105
  • NNWC: $328
  • NNWC Incr: $283
  • S&P500: $74

I was quite surprised to see the stark contrast between the NCAV and NNWC strategy. But upon thinking about it, NCAV will include PPE, intangibles, goodwill and other assets that aren’t really assets. NNWC on the other hand is as safe as you can get. Cash, accounts receivables and inventory.

Graham NCAV NNWC 15 Stocks from 2008-2009

The purpose of looking from 2008-2009 was to see how the strategies performed during a boom, bust and then boom again. 2008 started riding the tails of a market high in 2007 followed by the crash of 08 and uproar we had from March 09.

Turns out NCAV is having a miserable time. Investing $100 on Jan 2008 would have become about $25 by the end of 2009. The graph states that NCAV stocks are of low quality.

On the other hand, a surprising result is that stocks, where the NNWC has increased compared to the prior quarter, not only outperformed incredibly, but also held up very well while regular NNWC stocks were explosive, but at the same time, stomach twisting.

Graham NCAV NNWC Screen Performance – 10 Stocks

Here you can look at the performance if the portfolio was concentrated to the top 10 stocks.

An original $100 would have become

  • NCAV: $103
  • NNWC: $544
  • NNWC Incr: $503
  • S&P500: $74

That’s a gain of over 400% for NNWC stocks!

Graham NCAV NNWC 10 Stocks from 2008-2009

Top 10 Stocks with Increasing NNWC

Ticker Name MktCap ($M) Industry
HIHO Highway Holdings Limited 6.99 Misc. Fabricated Products
JAKK JAKKS Pacific, Inc. 331.8 Recreational Products
MPAC MOD-PAC CORP. 20.18 Paper & Paper Products
INOC Innotrac Corp 19.23 Business Services
PARL Parlux Fragrances, Inc. 35.62 Personal & Household Prods.
IRF International Rectifier Corp 1429.28 Semiconductors
CAMT Camtek LTD. 74.92 Scientific & Technical Instr.
BDR Blonder Tongue Labs, Inc. 6.69 Communications Equipment
WTT Wireless Telecom Group, Inc. 21.04 Electronic Instr. & Controls
MHO M/I Homes, Inc. 247.98 Construction Services

Top 10 Graham NNWC Stocks

Ticker Name MktCap ($M) Industry
PARL Parlux Fragrances, Inc. 35.62 Personal & Household Prods.
TGAL Tegal Corporation 10.44 Semiconductors
DITC Ditech Networks Inc. 34.27 Communications Equipment
ARCW ARC Wireless Solutions 7.57 Communications Services
IDSY I.D. Systems, Inc. 31.12 Communications Services
ENWV Endwave Corporation 23.73 Communications Equipment
MKTAY Makita Corporation (ADR) 4590.67 Misc. Capital Goods
MEAD Meade Instruments Corp. 3.65 Scientific & Technical Instr.
OBAS Optibase Ltd. 19.82 Communications Equipment
FMTI Forbes Medi-Tech Inc. (USA) 1.39 Biotechnology & Drugs

Author's Disclosure: None