Geoff Gannon October 9, 2010

Net Current Asset Value Bargains: How Do You Screen For Them? – Retained Earnings

A reader sent me this email:

I’m…curious how you start your searches for new ideas and what methods you use. Is there a starting parameter you choose to look at first, like 52wk. low or stocks trading below 50% of book value, etc.?


But I do keep lists.

I keep a list of stocks trading below net current asset value.

Net Current Asset Value = Current Assets – Total Liabilities

When you buy a stock where the net current asset value is more than the stock price: you get the customer relationships, brands, and factories for free.

Benjamin Graham bought stocks at 2/3 of net current asset value and sold them when the stock price hit its net current asset value. If the net current asset value didn’t change: Benjamin Graham made 50% on his investment.

Most net current asset value screens are bad. You need human eyes. Two good blogs that cover net current asset value bargains are: Greenbackd and Cheap Stocks.

I only keep track of stocks priced less than net current asset value if they:

a) Have more past profits than past losses or

b) Are planning to liquidate

The quickest way to check if a stock has more past profits than past losses is to look at retained earnings. Retained earnings are on the balance sheet. If retained earnings are positive: the business has more past profits than past losses. If retained earnings are negative: the business has more past losses than past profits.

This retained earnings trick can backfire. Spin-offs screw it up. It’s not perfect. But it’s quick. In seconds: retained earnings show you the net current asset value bargains worth studying.

Talk to Geoff About Net Current Asset Value Bargains