A. So, that’s what I’m going to answer today. But first what is meant by the Graham-Dodd intrinsic value line?
In a 1946 letter to shareholders of his Graham-Newton Corporation, Benjamin Graham made a clear and simple statement about his firm’s investment policy…
“Purchase securities at prices less than their intrinsic value”
Sounds complicated, but what he simply meant was…
An investor must buy companies whose share prices trade below what they really worth. And that’s exactly what the “intrinsic value line” shows you.
You see, Graham believed volatility in the mark was proof pricing inefficiency. He understood the REAL VALUE of a company couldn’t change dramatically as market prices do. And because of this, Graham identified that this pricing inefficiency created great investment opportunities.
So, back to the reader’s question…
How do you find this “intrinsic value line” or “mispricing” in stocks?
You need to look at a company’s Net Asset Value (NAV).
More specifically, the NAV on a per share basis.
It’s this simple ratio of…assets – liabilities/debt divided by the number of outstanding shares, which the likes of Ben Graham used to identify the true value of a company irrespective of how the market priced it!
And depending on the value of this number, it highlighted a unique situation in a company’s share price…One that if investor’s took advantage, could lead to incredible gains.
You can find each number in a company’s financial results. Or a quick way to find the NAVPS (particularly JSE-listed stocks) by searching on the Moneyweb website.
All you need to do is go to the search icon, type the ticker of the stock you’re looking at. Then, a screen will pop up with the company’s share price graph and a few fundamentals.
The “net asset value” number you see is the NAV on a per share basis (in cents). So, you don’t have to do any further calculations.
The next step is to compare this number with the company’s share price.
For example Calgro (JSE: CGR) share price currently sits at R6.25 per share and it’s NAVPS is R14.29.
To get the discount as a percentage use this formula: Current share price – NAVPS/NAVPS.
Using Calgro as an example, it would look like this: 625-1429/1429 – which equals 56%.
In other words, Calgro share price trades at a 56% discount to NAVPS.
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