Deep Value Investing
Deep Value Investing

Deep Value Investing

If we can find a stock whose current assets (i.e. inventories, receivables, cash etc.) minus its total liabilities are worth more than its current share price in the stock market, than we can talk of a stock that is trading at a discount to the net-net working capital position. (Location 255)

It seems, then, that buying assets is a less volatile exercise than trying to predict the next level of expected earnings. (Location 294)

Predictably, then, my favourite value stocks are those that are light on fixed assets and heavy on current assets. And these tend to be service companies ‚Äď for example, recruitment firms, financial services, consultants, house-builders (from time to time) and so on. (Location¬†301)

Interestingly, cyclical stocks always look cheapest on an earnings basis (i.e. measured by their P/E level) at the top of their cycle and most expensive at the bottom of the cycle, when their P/E levels are sky-high as their earnings have collapsed. (Location 305)

In the first place it is interesting to see where other shares are trading compared to their net asset valuations/net-net working capital levels. (Location 323)

Doing all this for balance sheets over a number of years means that the figures tell a story. The consistency (or lack thereof) of that story can tell you a lot more than figures in isolation. (Location 330)

Start with balance sheet valuations and then look at income statements. (Location 332)

To sell these stocks when they hit their net asset value, as some value investors would insist, would mean that my upside might only be some 10% or so. But by waiting for the earnings to re-establish again, they can easily go up 100% or 200% (not at all uncommon). (Location 348)

So that is the thinking behind my style of deep value investing: swimming against the earnings obsessives to pluck out liquid-asset-rich companies with nimble service-focused business models. Then buying them when no one else will, and selling them when everyone else wants them. (Location 352)

The balance sheet showed current assets of £123,415,000, mainly trade receivables and cash. Total liabilities came to £75,245,000, so the net-net working capital position worked out at £48,170,000. With the number of shares outstanding at 159,079,935, the net-net working capital per share was 30.3p. (Location 380)

In my calculations I generally ignore goodwill and intangibles as they are the most unreliable of assets. They tend to evaporate as a company encounters a more difficult business environment ‚Äď loss of market share, for example, can put severe pressure on goodwill valuations. (Location¬†395)

It is very important, when evaluating trade and other receivables, to look at a company’s clients. Who are they? Do they have a record of non-payment or doubtful debts? If a firm’s clients are also struggling then it is sensible to expect that perhaps not all receivables will actually be received. This figure should then be discounted, perhaps quite aggressively. But in the case of Spring Group, the majority of the company’s clients were major corporations in good financial health. That meant the valuation of this asset could be much closer to the stated amount. (Location 404)

Of course, there is still the chance that we can lose 100% of our investment, but the beauty of this investment style is that we should be now on the right side of the price paid and the value received. (Location 416)