There are a variety of reasons why a net current asset value stock appears in the stock market. These stocks are typically left for dead by the investing public for a variety of reasons. These companies may disappoint on the earnings and have, to the untrained eye, no prospects.
As such, bargain prices on these stocks allow investors with the trained eye and fortitude to go against the crowd and add such stocks to the portfolio. Think about it for a moment. If there was any certainty with regards to the future of the stock, the price that one pays is most likely to come at a premium.
I have mentioned this in my books. And perhaps, I would like to recount an experience that may or may not resonate with you. After all, Ben Graham’s net net approach requires some gumption and fortitude. Investors who use Ben Graham’s net net approach also have to have a contrarian streak in them. The ability to stand apart from the crowd and be patient is a must for the deep value investor.
I have written about a company called Leader Electronics Corporation. In my previous article, the company was written about from a low price to book perspective. But at the time of writing and purchase, it was trading at a price to liquidation value of approximately 50%. That is, if there were a voluntary liquidation of the company’s assets and after all liabilities have been paid off from the proceeds, one can expect to gain 100% based on the price paid.
But chances are that voluntary liquidations are not going to happen if the company is still a going concern. The question in most investors mind then was that the company was actually losing money. When would the tide turn for the company?
Wrong question my dear friends.
The question you should ask is if the company would survive? With a net cash of 280 JPY per share, low levels of debt(I can’t for the life of me recall how much debt it had on the balance sheet but it was negligible.), there was a high likelihood that the company would at least survive in the future.
It had 377 million JPY in losses in FY 2014 and its share price reached lows of 212 JPY. In 2016, the company reported less losses. It seemed that the losses were narrowing. So if you were to think about it loosely, if the company does report the same level of losses as in FY 2014, one can expect the share price to go down to between 200 to 250 JPY levels. But, if there was a surprise to the upside, one could see drastic asymmetric payoffs like I did.
For more regarding how I actually look at loss making net current asset value stocks, do read some of the books which I have published on Kindle Amazon.
Anyway, to cut the long story short, this was what we did. We purchased at a price 298 JPY. this price was approximately 50% of the estimated liquidation value.
And subsequently, this was what happened.
The price exceeded 1000 JPY in months. Talk about asymmetric payoffs, this was one such company that made a difference to my portfolio. There was a “shock” factor when the company actually reported a small positive earnings.
This is what asymmetry means. Mohnish Pabrai says it elegantly by calling it : Heads, I win ;Tails I don’t lose much. The risk reward ratio can be tremendous in such unloved stocks. And that is also the reason why we feel the Ben Graham’s teachings should be studied in greater detail.
Anyway, I will save the long stories for my books. This is a short little snippet of how the net current asset value strategy can work for one. If you consider yourself a small time investor, take this as temporary truth and investigate for yourself further.
In any case, may all readers be blessed with prosperity, health and happiness!
And of course, you can read my previous article here.