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Introduction to Grahamite Investing

post #1 of 4
Thread Starter 
Hey everyone,

I posted this on my blog earlier today and I thought it may benefit the HSM community. I see a lot of people on HSM trade based on T/A, but no one seems to discuss net current assets Here's the post.
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Ben Graham's style of investing focused on a company's net current assets, or current assets - total liabilities. If the total market cap is less than net current assets, you may have a potential bargain because it signifies that the company's ongoing business is selling for nothing. I sometimes view net current assets as a company's minimum liquidation value because it subtracts out all debts and other liabilities and leaves you with the current assets left over. As an example, let's look at Callaway Golf - ticker ELY.

Looking at ELY's Q3 2009 balance sheet, ELY has 518mil in current assets and 169mil in total liabilities, giving you a net current asset value of 518-169 = $349mil. At the current price of $8.00, ELY has a market value of $520mil, slightly higher than its net current asset value. At this point, Graham would not be an investor unless some other factor significantly outweighed the high market value. However, back in July, ELY had a stock price of $4.80, providing a market value of $310 million which is less than $349mil. Thus, this would indicate a stock in which further research is required for an investment but from just isolating this data, the stock seems to be priced at a bargain level.

An excellent way of comparing companies is to take what I call the net current asset (NCA) ratio. Simply divide the market value by the NCA to get your NCA ratio. The NCA ratio for ELY is currently $520/$349, or 1.49. Thus, ELY is trading at 1.49x its net current assets. Other competitors of ELY are trading at 5x NCA, meaning ELY is priced at a significant discount to that of its competitors.

I've noticed that different industries have very different NCA ratios. For instance, the average technology company is trading at 8x NCA. You'd be hard-pressed to find a Grahamite investment in the tech space

I've read a lot about comparing NCA to market value, but I've never seen it expressed as a ratio. By turning it into a ratio, you streamline the process and can then compare companies and industries that have different values for their net current assets and market caps. (As a full disclosure, I currently own ELY)
post #2 of 4
The only problem I see with ELY is that in the last quarter they have been losing money.

I like to use share price/book value. The lower the P/B ratio the better. But I always look at the financials(is the company a consistant earner?) If I can find a company that sells at less than book value AND is making a profit, even better.

Book value is simply... assets - liabilities. I also like to look at insider transactions. Are the insiders buying? Does the company pay dividends? I also don't like to pay over 15 times earnings.

If I can buy a company (that makes money) at 40 or 50 cents on the dollar, I think I will do well.

I also look at other things, 52 week highs and lows what is the customer base etc.

I mean really...if oil goes up 2 dollars in a day should I buy an energy stock? I think it would be better to wait a while.
post #3 of 4
Thread Starter 
Quote:
Originally Posted by greenarrow View Post
The only problem I see with ELY is that in the last quarter they have been losing money.

I like to use share price/book value. The lower the P/B ratio the better. But I always look at the financials(is the company a consistant earner?) If I can find a company that sells at less than book value AND is making a profit, even better.

Book value is simply... assets - liabilities. I also like to look at insider transactions. Are the insiders buying? Does the company pay dividends? I also don't like to pay over 15 times earnings.

If I can buy a company (that makes money) at 40 or 50 cents on the dollar, I think I will do well.

I also look at other things, 52 week highs and lows what is the customer base etc.

I mean really...if oil goes up 2 dollars in a day should I buy an energy stock? I think it would be better to wait a while.
These are great points and to be fair, looking at NCA should just be a starting point and at a minimum, should signal that further research is required. Not that it matters, but ELY is trading at a P/B below 1, which means its below BV. I like the investment because its a well-known brand name in the golf industry and has actually gained market share since the onset of the recession.

Your point on the negative earnings is very persuasive and it could put a dent in the NCA analysis if negative earnings deplete the asset base (such as a lower cash figure). The negative earnings on ELY are traditionally seasonal because they don't sell as many golf clubs/balls during the winter months.

I like your insight!
post #4 of 4
I'm not saying it is a bad buy, and you have to go with your own investment style.

It will most likely pick up as the weather warms.

Never thought about that. It also has brand recognition, doesn't it?

I am looking at VSO...tell me what you think of that one...you don't have to be gentle.
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