Learning your first strategy: Net-Net Stock Investing

Lets cut to the chase,

The “Net-Net Strategy” is essentially buying stocks at such a low price that an investor would come out ahead if the underlying company was shut down and liquidated.

Kindly note that all stocks used are not recommendations and are only utilized for explanation purposes

Understanding the following terms:

Before we begin, one must understand the term “Current Assets” and “Total Liabilities“, core elements of the net-net strategy.

Current assets are assets of a company which can be liquidated within a year, they include things such as :

  • Cash and cash equivalents
  • Inventories
  • Net Receivables
  • Short-term Investments

Total Liabilities are all outstanding debts and payables that the company is tied with

Finding a Net-Net Stock in SGX

First, visit the SGX Stock Screener and set the criterion to the following:

  • P/BV is the company’s share price divided by its book value (Assets minus Liabilities) per share, it should be less than 1
  • Debt/Equity Ratio is a company’s total amount of debt divided by its total shareholder equity.
  • Net Profit Margin is one of the most important indicators of a company’s financial health.

Calculating for a Net-Net Stock

Step 1 : Calculate the Net Current Asset Value (NCAV) of a stock

NCAV = Current Assets – Total Liabilities

Download the company’s Annual Report (ask google) into your computer and scroll to the financial statements (which is usually after the “Independent Auditor’s report” section.

Next, refer to the Balance sheet, also known as the Statement of Financial Position. Look under the latest year’s “Group” column to find :

  • Current Assets (Circled in Red)
  • Total Liabilities (Circled in Green)

In this case, we are looking at 2018’s numbers.

  • Current Assets: $92,743,000 (red)
  • Total Liabilities: $32,182,000 (green)

Thus,

NCAV = $92,743,000 - $32,182, 000 = $60,561,000

Step 2: Find the total shares outstanding

For this, we have to find the total share outstanding for the company.

Refer to the Balance sheet again and find the sub header, Share Capital.

  • Under share capital, look for the link to the notes (Highlighted in Pink)

In this case, refer to Note 24(a)

Highlighted in pink above is where one can find the total no. of outstanding shares.

Thus, total shares outstanding is 1,157,787,000

Step 3: Find the NCAV per share.

NCAV per Share = (Current Assets – Total Liabilities) / Shares Outstanding

NCAV per share = 60,561,000 / 1,157,787,000 = 0.0523(3 d.p)

Step 4: Graham’s criteria for buying NCAV stocks was if the stock price was 2/3 of the NCAV.

Graham’s criteria for buying NCAV stocks was if the stock price was 2/3 of the NCAV.

2/3 x 0.0523 = $0.0345

Thus, Graham would have bought the stock if the current market share price was less than or equals to $0.0345 and so should you!

When do I sell my Net-Net Stock

  • The best time-frame for your net net portfolio is three years.
  • This doesn’t mean you need to wait three years, though. If your net net stock reaches NCAV within the three years, you can sell it in a shorter amount of time.
  • The three year automatic sell rule is only in place to make sure you don’t hold on to deadbeat stocks.
  • Your downside is protected by the liquid assets and you are buying with a huge margin of safety.
  • If the company has other long term assets like buildings or cash overseas, that’s an included bonus if it can get unlocked.
  • The calculations for identifying net-nets are simple

What are the risks involved with Net-Net Stocks

  • Value Trap : Essentially, a value trap is a stock or security that looks like a bargain but never actually rises in price to reflect the securities full valuation.
  • Sometimes, the main one is that any company trading at or below NCAV is because it is going through some serious troubles.

How does one lower such risks ?

  • The value trap is actually covered in the three year sell rule
  • This why in the screener, we filter out the companys that are not profitable and that are running into un-payable debt

It is not only all about numbers, learn how to qualitatively analyze a company HERE.

We hope that the aforementioned strategy will be beneficial and aid one in taking the first step into the world of stocks and shares. However, we would like to remind everyone that it is only a recommended strategy and one should assess based on their own risk appetite.

Stay Tuned! Till next time …

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MAI GONG BO JIO !

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