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First Cut Stocks

Graham Stocks With a Low Price Relative to Net Current Assets

Applying Ben Graham’s philosophy, 25 profitable companies with cheap valuations made The First Cut.

by John Bajkowski | June 2016

Benjamin Graham’s 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 less all debt, both short- and long-term, and preferred stock.

Current assets consist primarily of cash and cash equivalents, receivables and inventories. Basically, these are assets that are already cash or are convertible into cash within a relatively short period of time (usually less than a year). Net current assets exclude not only the intangible assets but also the fixed and miscellaneous assets of a firm. In addition, Graham believed that preferred stock belongs on the liability side of the balance sheet, not as part of capital and surplus.

Graham recommended that a stock be purchased only if the price was two-thirds or less of net current assets. However, even during a bear market, it is rare in current times to find a stock selling below two-thirds its current net assets unless the company is in financial trouble.

This First Cut simply screens for domestic, exchange-listed stocks 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 financially distressed firms, all of the First Cut stocks have positive earnings per share along with positive cash flow from operations for the trailing 12 months. Stocks are also filtered so that total liabilities are no more than 50% of total assets as a simple test for financial strength.

The 25 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 annual growth rate in earnings per share and revenue over the last three fiscal years. The 52-week relative strength percentile rank highlights the relative price performance of these stocks over the last year. As the price column indicates, most of these stocks are trading with single-digit prices.

Like any First Cut, stocks passing the Graham low-price-relative-to-net-assets screen require additional due diligence before adding them to your investment portfolio.

—John Bajkowski, president of AAII

Stocks Passing a Simple Graham Low-Price-to-Net-Assets Screen


 Price-to-
Net
Current
Assets
(X)		 Price-
to-
Book
Value
(X)		 P/E
Ratio
(X)		 Div
Yield
(%)		 3-Yr Ann’l
Growth Rate		 Total
Liab
to
Assets
(%)		 52-Wk
Rel
Strgth
Rank
(%)		 Share
Price
(5/13)
($)		 Sector



Sales
(%)		 EPS
(%)
(Company (Ticker)
ADDvantage Technologies (AEY) 0.70 0.43 15.9 0.0 13.8 17.4 19.9 38 1.75 Technology
TSR Inc. (TSRI) 0.82 0.82 22.1 0.0 8.3 72.8 34.2 78 3.85 Technology
Skullcandy Inc. (SKUL) 0.84 0.64 23.1 0.0 (3.6) (39.6) 17.1 15 3.51 Consumer Cyclical
Friedman Industries (FRD) 0.85 0.63 109.7 0.7 (12.5) (63.9) 8.4 52 5.89 Basic Materials
Trans World Entertainment (TWMC) 0.89 0.68 48.3 0.0 (10.0) (56.7) 35.5 61 3.82 Services
Stanley Furniture Co. (STLY) 0.91 0.80 35.1 0.0 (2.2) (46.4) 23.3 46 2.56 Consumer Cyclical
EMCORE Corporation (EMKR) 1.04 0.97 94.8 0.0 (20.7) 64.3 12.1 48 5.32 Technology
Servotronics, Inc. (SVT) 1.10 0.65 4.2 3.9 6.4 38.3 28.4 86 7.67 Technology
West Marine, Inc. (WMAR) 1.17 0.81 41.2 0.0 1.4 (33.4) 30.4 59 9.51 Services
Rocky Brands Inc (RCKY) 1.18 0.64 18.1 3.7 5.6 (9.6) 28.4 22 11.91 Consumer Cyclical
Benchmark Electronics (BHE) 1.21 0.75 11.1 0.0 1.0 22.4 29.0 43 19.95 Technology
Wireless Telecom Group (WTT) 1.23 0.84 79.8 0.0 3.8 (47.6) 5.2 29 1.47 Technology
Continental Materials Corp. (CUO) 1.27 0.50 17.1 0.0 6.5 (25.8) 36.1 52 14.52 Capital Goods
CSS Industries Inc (CSS) 1.28 0.91 15.3 2.9 (6.6) 2.6 15.5 73 27.55 Services
Gencor Industries, Inc. (GENC) 1.30 1.23 112.9 0.0 (14.7) (34.0) 8.7 96 14.92 Capital Goods
AMCON Distributing Co. (DIT) 1.30 0.82 9.5 0.9 3.0 (2.9) 43.3 81 83.90 Services
Insignia Systems, Inc. (ISIG) 1.37 1.11 25.5 0.0 11.8 45.1 16.2 46 2.33 Services
P & F Industries, Inc. (PFIN) 1.40 0.56 8.9 2.4 10.9 (13.3) 15.6 78 8.37 Capital Goods
Data I/O Corp. (DAIO) 1.41 1.29 20.7 0.0 8.8 28.9 25.2 39 2.39 Technology
Ocean Bio-Chem, Inc. (OBCI) 1.43 0.99 44.5 0.0 3.1 (39.4) 13.9 30 2.28 Consumer Non-Cyclical
Frequency Electronics (FEIM) 1.49 0.94 86.2 0.0 6.4 (28.4) 22.2 39 10.00 Technology
Hurco Companies, Inc. (HURC) 1.49 1.21 13.2 1.1 2.6 0.6 28.8 59 32.30 Capital Goods
ENGlobal Corp. (ENG) 1.51 0.86 3.2 0.0 (29.6) 32.7 23.7 40 1.21 Capital Goods
Profire Energy, Inc. (PFIE) 1.52 1.08 148.9 0.0 47.6 16.4 6.3 22 0.91 Capital Goods
Movado Group, Inc (MOV) 1.64 1.29 12.9 2.1 5.6 (5.2) 24.7 49 24.63 Consumer Cyclical
Source: AAII’sStock Investor Pro, Thomson Reuters. Data as of 5/13/2016.


Criteria for Stock Investor Pro Users


 Field: Operator: Factor: Compare to:
  Price-Net Current Assets >   0
And Price-Net Current Assets <   1.65
And EPS-Continuing 12m >   0
And Cash from operations 12m >   0
And Total liabilities/assets Q1 <=   50
And Country Equals   United States
And ADR/ADS Stock Is   FALSE
And Sector Not Equal   Financial
And Exchange Not Equal   Over the counter
Custom Field
Price-Net Current Assets:
 [Price]/[Net current assets
per shr Q1]

Discussion

Marcus Hamilton from NJ posted over 10 years ago:

Companies often fail when receivables default and inventories lose value. I would set additional criteria based on receivable aging trends and inventory turnover trends. Like all your stock screens, there are too many penny stocks that are probably highly speculative.


Ryan from CA posted over 10 years ago:

Agreed. AAII would lean towards conservatism one would think. However, almost all of the stock screens and model portfolios center around small/micro-cap issues. I understand this is by design vis-à-vis the Shadow Portfolio, but these kinds of stocks find their way into multiple screens.


Ken Alexander from Alabama posted over 10 years ago:

Outstanding article that confirmed my approach to investing. This style has worked well with Target during the data breach as well as recent purchases of Caterpiller and Cummins. So far this approach has not worked out with Lumber Liquidators. Maybe the difference is payment of a dividend by the successful purchases.


Pete Koziar from Pennsylvania posted over 10 years ago:

It would be nice to be able to download this as a spreadsheet so we could sort on various columns and add other columns without having to retype it.


Ronald Ferrill from SC posted over 10 years ago:

Since AAII is an educational service, not an investment letter, I don't find the size of the stocks selected by the screen off-putting. To me, the key is understanding what different variables do to the screening of stocks. This is not to denigrate anyone's view that is different from mine. I just see the many articles as an ongoing education for me. Excellent and thought-provoking article/screen.


Thane Blinman from PA posted over 10 years ago:

You can import the table into Google Sheets by inserting this into the first cell of a new sheet: =IMPORTHTML("http://www.aaii.com/journal/article/graham-stocks-with-a-low-price-relative-to-net-current-assets?clicksrc=carousel_btn3","table", 1)


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