WHAT ARE WE LOOKING FOR?
Today we'll get some help from Bob Tattersall, executive vice-
president of Howson Tattersall Investment Counsel, and Benjamin Graham, the dean of value investing. Mr. Tattersall suggests a value screen based on what Mr. Graham calls net current asset value.
Mr. Graham defined this screen as working capital minus all obligations, including preferred stock. It takes current assets, minus current liabilities, to find a potential liquidation value for a company. We're seeking stocks that trade at or under net current asset value.
Mr. Tattersall consulted his trusty value investing bible, a 1962 edition of Security Analysis by Graham and David Dodd (original edition 1934), for a quote to bring meaning to this screen. To quote the book: "The purchase of a diversified group of companies on this "bargain basis" is almost certain to result in profitability within a reasonable period of time."
As Mr. Tattersall says, this implies that an investor either has to do a lot of extra homework on a few names, or buy a basket of them. "These are stocks which are deeply out of favour in the market," he adds.
WHAT TO WATCH OUT FOR
More homework is needed after this screen. Investors need to ask themselves if the assets and inventory are valued properly, and if the accounts receivable are collectible? Also, we now worry about non-balance sheet liabilities, such as environmental issues and pension deficits, which were probably not an issue in Ben Graham's day, Mr. Tattersall says.
WHAT have we learned?
Very few names emerge in both Canada and the U.S., and most of them are small to microcap, which is consistent with the complaint of many value investors that it is tough to find real bargains in today's market, Mr. Tattersall says. Or as Mr. Graham warns: "From the vantage point of our experience, we are inclined to regard the drying up of these bargain opportunities as an additional indication that the general market has reached a hazardous level."
| $ | Price/Net | Market | |||||
| Company | Recent | 52-wk | 52-wk | Net work. | Work. cap | Cap. | |
| U.S. (US$) | Sym | Price $ | high $ | low $ | Cap./shr | per shr | ($ mil) |
| Dominion Homes | DHOM | 4.94 | 10.75 | 4.02 | 17.97 | 0.3 | 42.0 |
| Comstock Homebldng | CHCI | 3.06 | 7.24 | 2.86 | 5.93 | 0.5 | 50.2 |
| Concord Camera | LENS | 4.49 | 5.40 | 2.10 | 6.88 | 0.7 | 26.0 |
| Shoe Pavilion | SHOE | 2.30 | 7.93 | 2.08 | 3.39 | 0.7 | 21.9 |
| Trans World Enter. | TWMC | 4.91 | 7.48 | 4.75 | 6.77 | 0.7 | 152.2 |
| M/I Homes | MHO | 28.95 | 39.11 | 25.11 | 39.36 | 0.7 | 405.3 |
| Bexil | BXL | 34.35 | 34.35 | 25.93 | 42.11 | 0.8 | 30.9 |
| Inhibitex | INHX | 1.40 | 2.37 | 1.32 | 1.64 | 0.9 | 43.3 |
| Orleans Homebldrs | OHB | 8.43 | 20.74 | 7.39 | 9.19 | 0.9 | 156.0 |
| Taitron Components | TAIT | 2.74 | 3.47 | 1.71 | 2.95 | 0.9 | 15.3 |
| Northfield Labs | NFLD | 1.51 | 17.94 | 1.36 | 1.59 | 0.9 | 40.6 |
| Finlay Enterprises | FNLY | 5.35 | 11.30 | 4.92 | 5.54 | 1.0 | 49.2 |
| Lazare Kaplan | LKI | 8.60 | 10.95 | 7.56 | 8.90 | 1.0 | 70.5 |
| Overland Storage | OVRL | 2.97 | 8.23 | 2.92 | 3.06 | 1.0 | 37.7 |
| Canadian (C$) | |||||||
| Goldfarb Corp A | GDF/H | 4.75 | 4.90 | 3.00 | 7.03 | 0.7 | 26.2 |
| Shermag Inc | SMG | 1.94 | 2.95 | 1.67 | 2.18 | 0.9 | 23.1 |
SOURCE: BLOOMBERG
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Scott Adams