How to Use a Net-Net Screener to Find Undervalued Stocks
Net-net investing, a strategy conceptualized by Benjamin Graham, involves identifying stocks trading below their Net Current Asset Value (NCAV). This approach aims to find companies whose market capitalization is less than the value of their current assets minus total liabilities, offering a potential margin of safety. A net-net screener simplifies this process by filtering out companies that meet this criterion.
In this guide, we'll assume you've used EveryNetNet's screener or have your own compiled list of net-net stocks. We'll explore the steps to analyze these companies further and integrate them into a diversified investment portfolio, emphasizing both quantitative and qualitative factors to consider.
Accessing the Net-Net Screener
Start by accessing a reliable net-net screener like EveryNetNet. These screeners filter stocks based on their NCAV, providing you with a list of companies potentially trading below their liquidation value.
Familiarize yourself with the screener's layout and functionalities. Ensure it covers the markets you're interested in, including international stocks if applicable.
Narrowing Down Your Search
To refine your list, apply additional screening criteria based on your investment strategy and preferences.
Industry Filters
Focus on industries you understand to assess companies more effectively. Select sectors where you have expertise or interest, and avoid those facing systemic issues.
Country and Market Filters
Depending on your strategy, include or exclude countries based on political stability, regulatory environment, and economic conditions. Consider currency risks and market accessibility.
Financial Criteria
Incorporate additional financial metrics to refine your search:
- Set market capitalization ranges.
- Filter by debt-to-equity ratios.
- Consider price-to-earnings (P/E) ratios.
- Look at return on equity (ROE).
Qualitative Criteria
Beyond numbers, consider management quality, brand reputation, and competitive advantages.
Reviewing the Screened List
Review the refined list to identify companies that align with your investment goals. Create a shortlist by selecting those within your circle of competence and ensuring they meet your criteria.
In-Depth Company Analysis
Conduct a thorough analysis of each company on your shortlist.
Investigating Current Assets
Understand what makes up the company's current assets:
- Cash and equivalents indicate liquidity.
- High inventory levels may pose risks.
- Assess accounts receivable for collectability.
Determining the type of net-net company helps assess risk and potential returns. - Cash-rich net-nets are generally safer. - Inventory-heavy net-nets may offer higher returns but carry more risk.
Evaluating Financial Statements
Analyze balance sheets for financial stability, review income statements for profitability, and examine cash flow statements for operational health.
Utilizing Translation Tools
For international companies, use tools like the Google Translate Chrome Extension to translate reports. Verify critical data and be mindful of accounting differences.
Assessing Other Financial Metrics
Consider earnings stability, cash burn rate, and interest coverage ratios to gauge financial health.
Conducting Qualitative Analysis
Research management experience, insider activity, and the company's market position.
Considering Geographic Factors
Geographic location can impact investment risk and return. Exclude countries with political instability or weak regulatory environments. Understand international investing considerations like currency risk, tax implications, and market accessibility.
Adjust your screening criteria accordingly, focusing on markets where you have better access and understanding.
Diversification Strategy
Diversification helps mitigate risks associated with individual companies. Include a sufficient number of stocks, avoid overexposure to a single industry, and spread investments across different regions. Decide on equal weighting or adjust based on conviction levels.
Monitoring Your Portfolio
Regularly monitor your investments to stay informed about company developments and market conditions. Establish clear exit strategies, such as selling when a stock reaches its intrinsic value or if there's a significant deterioration in fundamentals. Rebalance your portfolio as needed.
Conclusion
Using a net-net screener is an effective way to identify undervalued stocks. By applying a systematic approach—refining your search, conducting in-depth analyses, considering geographic factors, diversifying your portfolio, and monitoring your investments—you can uncover opportunities that others might overlook.
Start your net-net investing journey today with EveryNetNet's comprehensive screener and take advantage of the tools available to make informed decisions.