Net-Net: A Formula for Value

08/29/2014 10:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

J. Royden Ward is an expert on value investing strategies. Here, the editor of Cabot Benjamin Graham Value Investor, explains the “net-net” indicator and looks at a stock that earns a buy rating from this value metric.

Steven Halpern:  Joining us today is Roy Ward, editor of Cabot Benjamin Graham Value Investor.  How are you doing today, Roy?

Roy Ward:  I’m fine, thanks Steve.

Steven Halpern:  Well, thanks for joining us.  Most all investors are familiar with Warren Buffett, but not all know about his mentor, Benjamin Graham, who’s considered the father of value investing.  Could you give us some background about Ben Graham?

Roy Ward:  Yes, certainly.  He was born in London in 1894, but his family moved to New York City when he was a boy and he spent most of his life in New York City. 

He wrote several books and among them is a book entitled Securities Analysis, which is somewhat complex, but it gives several ideas on how to measure a company’s intrinsic value and a lot of other ideas. 

His most readable book in my opinion, which is an easy read, is The Intelligent Investor, and again he gives several examples of how to measure a company’s value and how to apply that in the current market. 

Steven Halpern:  What’s interesting, really, is that those strategies that he put down many years ago are just as applicable in the investment markets today. 

Roy Ward:  They are. It’s pretty amazing.  Still get excellent results using his analyses today and it’s held through all for about 80 years. 

Steven Halpern:  Now you’ve followed Ben Graham’s criteria for many years, but you’re only now introducing one of his indicators which is known as the “net-net” or NCAV. Could you explain what this indicator is and perhaps touch on your decision to introduce it to your strategy now. 

Roy Ward:  Sure, the net-net—or net current asset value approach—is based on a simple calculation, which Ben Graham describes in both of his books.

The calculation simply is: you take total current assets and you subtract total liabilities from it and then you take that result and divide it by the number of common shares outstanding. 

I started using the NCAV or net-net strategy to find undivided stocks after discovering that when you compare the current price to its net current asset value you don’t need to limit the results to stocks with ratios of less than 0.67, which Ben Graham suggested. 


I’ve been looking at stocks that have ratios less than 0.67 during the last several years and usually come up with stocks that are very volatile, very small, and have, therefore, high risk. 

But I found that if you raise that limit to 3.0, the resulting list of stocks will include several high quality stocks with good growth prospects, and high quality stocks with solid current assets and low total debt have performed very well during the past year.

Steven Halpern:  Now to put the NCAV into perspective for our listeners, perhaps you could walk us through how you apply this measure to a specific investment idea and I believe you just recently added a buy recommendation for Avnet (AVT) based on this approach.

Roy Ward:  Right, Avnet, again, is an easy stock to analyze using this NCAV or net-net approach.  The current assets for Avnet are about $9 billion, and total debt is about $6.2 billion.

So the net-net of current assets and total debt is 2.7 billion, roughly, and Avnet’s number of shares outstanding is 138 million so when you divide 2.7 billion net-net by those shares outstanding of 138 million you get about $20 in NCAV value. 

Now, the current price of Avnet is about 4485, so when you divide 4485 by the NCAV of $20 you get about 2.25 ratio and that’s less than my cutoff of 3.00 so I can consider it undervalued and desirable.  We’ve got the NCAV value and a strong balance sheet, good growth prospects, and it’s undervalued, so I like it.

Steven Halpern:  For those listeners who are unfamiliar with the company, could you just briefly describe what Avnet does.

Roy Ward:  Sure, Avnet’s one of the largest distributors of semiconductors, service, data storage products, and peripheral equipment.  It operates about 300 locations and is worldwide and serves about 100,000 manufacturers, so they’re a wholesaler, middleman, but they do add value to products that they sell.

Steven Halpern:  Well, we really appreciate you taking the time to join us and sharing your ideas.  Thank you.

Roy Ward:  You’re welcome Steve, glad to do it.

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