Screening for Net-Net Style Bargains

Benjamin Graham, the father of value investing, introduced the concept of net-net stocks in the 1930s. The idea is elegantly simple: buy companies trading below their net current asset value (NCAV) — that is, current assets minus total liabilities. At these prices, you are essentially getting the business for less than its liquidation value, providing a substantial margin of safety.

While true net-nets are rarer today than in Graham's era, the underlying principle remains powerful. Screening for stocks trading at steep discounts to their asset values can uncover overlooked opportunities, particularly among smaller companies that institutional investors ignore. This guide walks you through building a modern net-net screen.

What to Look For

A proper net-net screen focuses on these fundamental characteristics:

• Price below NCAV: The classic Graham criterion is a stock price below two-thirds of NCAV per share. NCAV equals current assets minus total liabilities (not just current liabilities). This extreme discount provides a margin of safety even if the business deteriorates further.
• Low price-to-book ratio: While not identical to the net-net calculation, screening for stocks with price-to-book ratios below 0.5 or even 0.3 can serve as a practical proxy. These deeply discounted stocks often overlap with net-net candidates.
• Adequate current ratio: Look for current ratios above 1.5 to ensure the company has enough liquid assets to cover near-term obligations. A high current ratio supports the idea that the assets on the balance sheet are real and accessible.
• Positive working capital: The company should have meaningfully more current assets than current liabilities. This is the foundation of the net-net thesis — the liquid assets exceed what the company owes.
• Reasonable cash burn: A company trading below liquidation value is only a bargain if it is not rapidly burning through its assets. Check that the company is either profitable or has a slow enough cash burn to sustain operations for years.

How to Set Up the Screen

Setting up a net-net screen in practice requires a few adjustments from the textbook approach:

1. Start by filtering for stocks with a price-to-book ratio below 0.5. This casts a wide net for deeply discounted companies relative to their reported assets.
2. Add a minimum market capitalization of $10 million to $50 million. Net-nets are typically small and micro-cap stocks, but you want to avoid penny stocks that are essentially uninvestable.
3. Filter for positive book value per share. Companies with negative book value have liabilities exceeding assets and do not qualify as net-nets by definition.
4. Look for companies with low or manageable debt-to-equity ratios (below 0.5). Excessive debt erodes the asset cushion that makes the net-net thesis work.
5. Consider adding a profitability filter — even a minimal one like positive trailing twelve-month earnings — to avoid permanent capital destruction.

Interpreting Results

Net-net screens typically produce a short list of candidates, many of which will be micro-cap companies in out-of-favor industries. This is expected and actually desirable — the inefficiency of these forgotten corners of the market is precisely what creates the opportunity.

When evaluating results, look beyond the raw numbers. Ask why the stock is so cheap. Is it a cyclical business at the bottom of its cycle (potentially good)? A company in secular decline (potentially bad)? Or a misunderstood situation where the market has overreacted to temporary problems (potentially great)? Diversification is critical with net-nets — Graham recommended buying a basket of 20 or more to offset the inevitable losers.

Common Pitfalls

• Value traps: The biggest risk in net-net investing is buying a company that is cheap for good reason. Management may be destroying value through poor capital allocation, or the business may be in irreversible decline. Always investigate why the stock is so cheap.
• Illiquidity: Many net-nets trade with very low daily volume. This makes it difficult to build or exit a position without significantly moving the price. Factor in liquidity constraints when sizing positions.
• Asset quality: Not all current assets are created equal. Cash is worth face value, but inventory may be worth far less if the company cannot sell it. Receivables may include uncollectible accounts. Scrutinize the composition of current assets carefully.
• Concentration risk: Net-nets often cluster in a few sectors like financials, energy, or basic materials. Be conscious of sector exposure and diversify across industries when possible.

Screen Now

Ready to hunt for deeply discounted stocks trading near liquidation value? Start screening with our value-oriented tools:

• Use the Value Screener Preset and add a price-to-book filter to zero in on the cheapest stocks in the market.