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.
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.