How to Find Net-Net Stocks: A 10-Point Checklist

What counts as a net-net stock?

Benjamin Graham described the idea in Security Analysis (1934) and The Intelligent Investor. Take a company's current assets (cash, receivables, inventory), subtract all of its liabilities and any preferred stock, and you have its NCAV. Long-term assets such as buildings and equipment count for nothing. If the market capitalization is below that figure, the stock is a net-net.

Graham went further and preferred to buy at two-thirds of NCAV or less. For the full formula and a worked example, see what net current asset value is and how to calculate it.

Where net-net stocks come from

Net-nets are rarely household names. They tend to share a few traits:

• They are small, often micro-caps that big funds can't or won't buy.
• They have little or no analyst coverage.
• They have recently reported losses, or work in an industry investors dislike.
• They hold more cash than they need, which is common in some markets. Japan has long had more net-nets than anywhere else; see why there are so many net-net stocks in Japan.

The supply also moves with the market. Net-nets are scarce after long bull markets and plentiful after crashes, when investors sell small, unloved companies indiscriminately.

Three ways to build a net-net stocks list

1. Calculate it yourself from filings

You can pull balance sheets from regulators such as the SEC's EDGAR in the US or EDINET in Japan and compute NCAV company by company. It is free and teaches you a lot, but covering a whole market this way takes a very long time.

2. Approximate it with a general stock screener

Most free screeners don't offer NCAV as a field. You can get close by filtering for a low price-to-book ratio and a high current ratio, then checking each result by hand. Expect plenty of false positives, and you will still miss companies the screener doesn't cover.

3. Use a dedicated net-net screener

A net-net screener does the NCAV math for every listed company and shows only the ones trading below it. EveryNetNet covers 1500+ net-nets across 50+ countries and updates daily. The free plan shows 50 US net-nets, and Pro unlocks the full global list. Our methodology page shows exactly how we calculate NCAV. Once you have a list, here's how to narrow it down.

The 10-point net-net checklist

A screen only tells you a stock is statistically cheap. These checks help separate bargains from value traps.

1. Recalculate NCAV from the latest balance sheet.

   Don't rely on any single data source, including ours. Open the most recent annual or quarterly report and work out current assets minus total liabilities, minus preferred stock and minority interest. If the company has reported since the screen ran, the answer may have changed.

2. Check the size of the discount.

   A stock trading at 95% of NCAV leaves little room for error. Graham's rule of thumb was to pay no more than two-thirds of NCAV, which means a price-to-NCAV (P/NCAV) of about 0.67 or lower. The bigger the discount, the more mistakes in the rest of this checklist the position can absorb.

3. Look at what the current assets actually are.

   Cash is worth face value. Receivables usually are too, unless customers are struggling. Inventory is the weak spot: fashion, electronics and anything perishable can be worth far less than book in a sale. If inventory is a large share of current assets, run the stricter net-net working capital (NNWC) test as well.

4. Measure the cash burn.

   Losses eat NCAV. Compare operating cash flow over the last few years with the gap between NCAV and market cap. A company burning a third of its NCAV a year can stop being a net-net before the market notices it was one.

5. Search for liabilities the balance sheet doesn't show.

   Read the notes for pension deficits, lawsuits, guarantees, purchase commitments and environmental claims. Any of these can absorb the "excess" current assets you are paying for.

6. Check the share count and dilution.

   Use diluted shares, and look for convertible notes, warrants and recent share issues. A company that regularly sells new stock to fund losses transfers the discount from you to its new shareholders.

7. See who owns the company and how they behave.

   Insider buying, buybacks and dividends are good signs that management sees the same value you do. A controlling shareholder who has never returned cash, or who does business with the company on unusual terms, can keep the discount in place for years.

8. Ask whether the cash can reach shareholders.

   Cash held in a subsidiary abroad, behind capital controls, or pledged to lenders is worth less to you than cash in the parent company. Be especially skeptical of large cash balances at companies whose filings are hard to verify.

9. Watch for accounting red flags.

   Late filings, auditor resignations, qualified audit opinions, and receivables growing much faster than revenue are all reasons to move on. Net-net lists attract companies where the numbers turn out to be wrong.

10. Check liquidity and look for a catalyst.

    Some net-nets trade only a few thousand dollars of stock a day, so check that you can buy, and later sell, the position you want. A catalyst helps: a return to profit, a buyback, an activist investor, an asset sale or a takeover can all close the gap between price and NCAV.

Diversify instead of betting on one name

Graham treated net-nets as a group operation: buy many of them and let the winners carry the losers. Individual net-nets fail more often than ordinary stocks. In his 2008 study of global net-nets, James Montier found that about 5% of net-net selections fell 90% or more in a single year, against about 2% for the broader market, yet the portfolio as a whole still beat the market by a wide margin. Read more in the historical returns of Graham's net-net strategy.