Value investing: finding value stocks

A company’s current assets include cash, inventories, accounts receivable, etc. Graham’s approach starts by adding up these current assets and subtracting total liabilities (current and long term). The difference is the company’s net current asset value.

You don’t have to know what to include in current assets and total liabilities because the results are
neatly tabulated for you on many Web sites.

Next, divide the net current asset value by the number of shares outstanding to get the net current asset value per share. Graham’s criteria calls for selecting stocks selling for no more than 66 percent of the net current asset value.

So, if you calculate the net current asset value for a stock to be $10 per share, you shouldn’t pay more than $6.60. It’s that simple!

What kind of rewards do you get for doing this heavy math? A study by Henry Oppenheimer reported in the 1986 issue of the Journal of Financial Analysts looked at buying stocks based on this strategy on December 31st of each year from 1970 through 1983, holding the stocks for one year, and then making new selections. The mean return for the 13-year period was 29.4 percent per year versus 11.5 percent for the market in general.

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