While working on the section of my book (work-in-progress; please leave a comment to encourage me to finish it!) that will deal with Benjamin Graham’s net current asset value (current assets less all liabilities) approach, I found that there is a lack of data out there that reviews this concept. In fact, there are only two places I found an easy way to find these companies. First, there is the GrahamInvestor.com screen, which screens for companies that currently fall below their net current asset value. Second, there is the Value Line Investment Survey Bargain Basement Screen, which narrows it down further to companies that also trade at lower P/E multiples – and indirectly to established companies that are followed by Value Line.
Ideally for the book I would have liked to have found a back history of the companies that have fallen under this screen; however, I can only find the last 12 issues of the survey (if you know of a way I can get back issues, please let me know). As a result, I’ve created the Bargain Basement Portfolio. This portfolio will follow these rules:
- Using the Value Line Bargain Basement Screen, select companies that are priced at 75% or lower of Price-to-”Net” Working Capital and have achieved a positive EPS for at least 5 straight years.
- Buy shares when the price is 75% or lower, and hold until the price is 150% or higher of “Net” Working Capital.
- Maximum number of companies invested at a given time is 5 (target allocation of 20% of portfolio). If there are more than 5 suitable companies, any purchases will be made in the company with the lowest Price-to-”Net” Working Capital ratio.
- Any funds not invested in suitable companies will be invested in the iShares Barclays 10-20 yr Treasury ETF, ticker symbol TLH.
- Any dividends received are placed in cash to be reinvested during rebalancing.
- Portfolio is rebalanced to target allocations every 3 months.
As you can probably tell, this is a very risky portfolio. First, the companies that traditionally fall below NCAV are usually experiencing some sort of trouble and second, I’ve designed it to have a target allocation of 20% per company. This is not a portfolio that would be recommended for any investor’s full portfolio, but rather the purpose is to study the approach and see if the companies perform well over time.
I believe the risk is lowered by the requirement of having achieved a positive EPS for at least 5 straight years. This requirement nearly forces the company in question to pass the Enterprising Investor’s screen (the company then only has to either pay a dividend or have EPSmg greater than 5 years prior), and thus narrows the list to companies that are a little stronger than traditional NCAV companies. In addition, I believe the Treasury ETF holding for the cash levels will lower the overall risk of the portfolio when there are less than 5 companies to invest in.
I chose to use the Bargain Basement screen from Value Line because I believe that further lowers the risk of the portfolio. These companies are fairly established and also trade at a low price to earnings multiple. Value Line determines the “net” working capital by taking the “current assets less all liabilities including long-term debt and preferred.” The stocks selected for this portfolio come from Value Line’s Bargain Basement Stocks screen, which are “stocks with current price-earnings multiples and price-to-”net” working capital ratios that are in the bottom quartile of the Value Line universe.” You can view the screen in the Value Line Investment Survey’s weekly Summary and Index. Click here to sign up for Value Line Investment Survey’s 13-week Trial.
Now, enough explanation. Let’s move on to the portfolio. I have set it up with an inception date of March 27, 2009, and input all transactions that would have been made since then. On the inception date, Value Line listed six companies that were trading at 75% of net working capital or lower. Only four of them had achieved positive earnings per share for the last five years: Movado Group (MOV), Skechers USA (SKX), Ashland Inc. (ASH), and PC Connection (PCCC). As a result, the portfolio purchased all 4 at approximately $20,000 for each of them. Furthermore, the portfolio invested the remaining $20,000 in the iShares Barclays 10-20 yr Treasury ETF (TLH).
On April 29, 2009, Ashland Inc. crossed over the 150% of “net” working capital level and was sold for a gain of 86.8%. Since there were no new suitable companies to invest in, the cash was placed in the Treasury ETF (TLH). Since then there have been no further transactions other than dividends received.
To date, the portfolio is currently up about 35% versus approximately 13% gain for the Dow Jones Industrial Average and approximately a 16% gain for the S&P 500 Index. You can view the current and historical weekly value of the portfolio, and transaction history in this google spreadsheet.