5i Filter - Graham and NCAV

Ryan M Feb 09, 2015

Few investors (if any) have as large and devout of a following as the author of the Intelligent Investor and mentor to Warren Buffet, Benjamin Graham. In Grahams book, which should be on every investors reading list, he outlines a stringent methodology for screening stocks, which involves a ‘net current asset value’ or NCAV calculation. To take it a step further and really push the value classification envelope, Graham would only consider stocks trading at or below 66% of the NCAV calculation. The actual NCAV calculation takes total current assets, less total liabilities and then divides this number by shares outstanding to get a per share value. Unfortunately, as time has passed, stocks trading at these valuations have become next to impossible to find so most of these screens need some sort of adjustment to actually have any investments returned. Because of this, we have relaxed a few parameters while not jeopardizing, in our view, the primary goals of the filter:

  • Market-cap of over $100 million
  • Positive P/E ratio (or positive earnings)
  • NCAV/Price of 150% or less

As usual in our filters, we like to screen out speculative stocks as much as possible which is why we use the $100MM market-cap filter here. The positive P/E ratio was included to filter out stocks that did not have positive earnings while also providing a good quick judgment of whether we would consider the stock a value investment or not. We also list NCAV for convenience but filter it out through the NCAV/P metric, allowing for a range from 150% and below. For informational purposes, we have also included the current ratio as well as total liabilities and current assets.

We actually found more stocks than we were expectingwith this filter and were happy to see a 5i Research coverage company in the list (Canaccord). As always, the contents of the filter are in no way a buy or sell opinion and rather just a list of interesting stocks an investor may want to research further.  Senvest Capital was an interesting result but we would point out some very low trading liquidity in the name.  We like the dividend and debt free balance sheet of Clarke Inc. and RME also pays a nice dividend but the stock has been beaten up as of late due to a fear of the knock-on effects a lower oil market could have on equipment purchases out West. Canaccord is an interesting value play and the valuation has actually been one of the primary reasons we like it so much. We have also always felt it to be an interesting ‘derived demand’ type of investment for the resource space. Overall, we think the filter presents some interesting opportunities that could warrant further due diligence. Our only caveat would be that, often times, stocks trade at a discount for a reason. Investors need to determine why this discount exists, and whether it is justified.

We post the filters monthy, so sign-up to the blog on the right sidebar for regular updates and check out the previous filter here.

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John M. (Jack)
Feb 14, 2015
I recently had the book "The Warren Buffett Way" given to me and reading it, I thought this sounds alot like the way 5i researches stocks. I have since bought "The Intelligent Investor" and am just starting to dig into it. This months' Research Blog confirmed my thinking and the tips you lay out that need to be used to make Graham's system work was most helpful. Thanks - John Smith e-mail colliedog18@shaw.ca