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Concept

Bargain Issues

Bargain issues are stocks whose market price is below the company's net current asset value (current assets minus all liabilities and preferred stock), so the buyer gets the business's long-term assets and future earnings for nothing.

In The Intelligent Investor, Benjamin Graham argued that the enterprising investor earns extra return only by doing work most people skip. Bargain issues are his clearest case. Take current assets (cash, receivables and inventory) and subtract every liability, including long-term debt and preferred stock. The result is net current asset value (NCAV), often called a 'net-net'. If the whole company sells for less than that, you are paying less than its short-term resources alone are worth. The factories, the brand and any future profits come free. Graham wanted a price at or below two-thirds of NCAV, which gives a cushion. These stocks are rarely glamorous. They are neglected and out of fashion, often after a bad year, the opposite of the hot new issue. Some are cheap for a good reason because they burn cash every quarter. That is why Graham bought them as a group rather than betting on one.

A real-life example

Picture a small regional manufacturer after two losing years. Its balance sheet shows $90 million in current assets: $30 million in cash, $25 million in receivables and $35 million in inventory. Total liabilities are $40 million, and there is no preferred stock, so NCAV is $50 million. The market values the entire company at $32 million, which is 64% of NCAV. An investor confirms the losses are shrinking. She then buys it as one of twenty similar positions. The plant comes free.

How to use it

  1. 1Calculate NCAV yourself from the latest balance sheet: current assets minus all liabilities and preferred stock. Then compare the result with the company's market value.
  2. 2Ask why it is cheap before buying. If the company burns cash every quarter, NCAV is melting. Shortlist only names priced at or below two-thirds of NCAV with losses that are not growing.
  3. 3Never rely on one stock. Build a basket of at least 15–20 bargains and write your sell rule in advance, for example selling when the price reaches NCAV.