The First Cut: Low Price Relative to Net Assets
by John Bajkowski
When markets become volatile, the first reaction for many investors is to turn away from stocks. However, seeking out values among fallen stocks often proves to be a strong motivation to bring investors back into the market, and the teachings of Benjamin Graham serve as the inspiration for this issues First Cut. His most basic approach looked for stocks trading with a low price-to-net-current-assets ratio.
The ratio compares the current market price of a stock to the current assets (cash, accounts receivable, inventory, etc.) less all debt, both short- and long-term including preferred stock. The First Cut calculation modifies this ratio to add long- and short-term investments to assets. The First Cut screens for exchange-listed stocks trading with a low ratio of price to net current assets. Stocks in the financial sector were excluded because their financial statements are not directly comparable to other industries.
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