- All NCAV stocks are not created equally - some NCAV investments are way more promising than others.
- Core Criteria
- Not Chinese - Company based in China or major operations in China.
- Low Price to NCAV - < 50%. Price smaller - better return. The higher priced NCAV stock has a greater likelihood of falling further in price while the cheaper priced company can provide great returns even if it doesn’t reach full net current asset value.
- Low Debt to Equity - < 25%. NCAV can easily be wiped out if debt too high. Low Debt to Equity = large margin of safety. !!! unfunded pensions aren’t included as part of the balance sheet so you have to dig for the information.
- Adequate Pass Earnings or Catalyst - No need to compare net profit margin with peer. Some obvious catalys on horizon that would lead to improved business results or meaningful risen in stock price e.g. management put company for sale
- Pass price Above NCAV - When a company’s stock has traded below NCAV for years it’s a big red flag. [1] management is having a tough time addressing the business issues they were facing and that their either unwilling or unable to sell the firm. [2] management is just complacent and content to suck back fat salaries while the business does nothing for investors.
- Existing Operations or Liquidation - e.g. legal entities (corporations, LLCs, etc) sitting on a bank account but not much more, with only faint promises of future business operation, or pharmaceutical research companies which always seem to burn through their working capital without much to show for it. An obvious exception to this is buying a pile of assets that are going to be liquidated.
- Not Selling Shares - What could be worse than a company that’s selling its own shares while they trade below NCAV?
- Key Quantitative Criteria
- Large Current Ratio - As large as possible. I want as large of a gap between the current assets and the current liabilities of a company. Having a large gap serves as a margin of safety of sorts.
- Small Market Cap - < $50M USD. The profits an investor can make from a handful of tiny companies dwarfs the profits he or she can make from a portfolio of small or mid cap companies.
- Low Price to Net Cash - It insure the quality of the assets.You can be more certain of the value of the liquid asset. Investors only have a best guess at what they’re worth while cash has a bulletproof value.
- Key Qualitative Criteria
- Financial/regulated/ADR/Real Estate/closed fund - Stay away. Only invest in industrials or retail companies, and other similar firms. It can lead to a lot of problems if an investor is not careful. If the bank breaths wrong then the equity can be completely wiped out.
- Company is Buying Back Stock - Every time a net net company buys it’s own stock it increases the value of my own holdings. And, it also makes a strong vote of confidence in its own future.
- Major/Minor Insider Buys Vs. Sells - Insiders have the best understanding of how the company is currently doing. Insiders can sell shares for many different reasons but they only buy stock for one reason — they see a significant opportunity to earn capital gains.
- Burn Rate Low or Positive - % change in NCAV from year to year. Avoid company whose net current asset value is rapidly eroding
- Catalyst - something that will happen in the future which will spark a return to fair value.
- Insider Pay - I don’t like it when managers of tiny companies have large salaries relative to assets or revenue.
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