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.
To help eliminate firms in financial trouble, all of the First Cut stocks have positive earnings per share along with positive cash flow from operations for the most recent fiscal year and over the last four quarters. Stocks are also required to have debt levels below their industry norm as a simple first test for financial strength.
The 30 stocks with the lowest price-to-net-current-assets ratio are presented below. Additional popular price multiples are presented to provide a feel for how these stocks measure up using book value, earnings and dividends. Our First Cut listing also includes the historical earnings growth rate to examine recent growth, the market capitalization to indicate firm size, and the price as a percent of 52-week high to highlight stock market performance.
Most of the stocks passing the screen are very small companies, a normal outcome. It is also worth noting that a concentration of technology stocks with strong historical earnings growth, but steep declines from their 52-week highs, currently pass the screen.
AAII Vice President, Senior Financial Analyst