ValuePickr Forum

Why nobody is talking about Graham Number in this wonderful opportunistic situation

I have just started my journey after reading " Intelligent Investor" by Benjamin Graham.
one of the great learning’s from the book was Graham Number and safety of margin in terms of stock selection. But unfortunately it seems nobody talks about the concept anymore. I rather find it extremely baffling since there are at-least 50 good companies stock are available with lot of safety of margin since last 3 months. can some seniors guide me on this more @hitesh2710 @pankha @DMUTHUKRISHNAN @basumallick

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Can you share these companies and the exact filter you use? We can have an interesting discussion if we know what kind of companies are currently making the cut.

I last did an exhaustive graham kind of filter (net nets kind of things) in late March and found a couple of interesting companies. However, most of these were quite small (<150 cr.). Here are my recollections which were not obvious frauds:

  • Shemaroo (due to its high stated inventory)
  • Cochin shipyard and BSE because of their large cash
  • NALCO NMDC and a few other cyclicals because these are debt free and are at low part of their cycles (you need to bet that cycle will turn at some point)
  • Unichem labs came to 0.66 of its net working capital for one day (that was a no brainer and I was stupid enough not to buy it!!!)

However, most of the net net opportunities (BSE, Unichem) have already been arbitraged. For Shemaroo, you need to trust its stated inventory number, if you do its a net net. Some other companies were too small for my liking (i.e. like 50 cr. Mcap) and I didn’t understand them.

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companies from different sectors but not necessarily less than their graham number, some are very close to GN. Some of the names from my vault. You can just screen these through Screener.in…
Rane Brake, GNA Axles, Apex Frozen, Transpek, Insectisides, UPL, Tata Chemicals, Chambal, GM Brew, Assoc Alcohol,E-Clerx, Excel, Oriental Carbon, Kanchi Karpooram, Mangalam, Ultramarine, Diamines, Permanent Magnet, Voltamp, ISGEC, VA Tech Wabag, PSP, PNC Infra, H.G Infra, KNR, Sun TV, TV Today, Tech M and HCL (not exactly though), Expleo, Sandur Manganese, Maithan Alloys, Tata Metaliks, Jindal Hisar, Welspun Corp, NESCO, Pokarna, Spandana Spoorthy, Manappuram, PFC, IOC, AlphaGeo,Repro, Suven, Jubilant (almost), Tyche, Nilkamal, Mayur Uniq, Andhra Paper, Jagdamba Poly, Sobha, Cochin Shipyard, Andhra Sugar, Dhampur Sugar, Balrampur Chini,Kewal Kiran, Kitex and Avantel

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The list you are sharing is clearly not the original graham net nets. Graham stated that if a company’s market cap is below 2/3rd of its net liquidable value, we should buy them as a basket. His selling rule was 50% gain or 2 years (whichever happens first). That’s the most classic graham screen and one that I follow as this situation doesn’t happen quite often.

thanks for pointing out. Pls guide me on using the website screener then… since apart from these companies mentioned there are lot of other companies which I filtered out due to low ROCE, ROE and EPS

The original graham screen is something similar to this one
https://www.screener.in/screens/6076/Net-current-asset/

However, you should remove growth parameters

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Thanks Harsh…but if you observe the intrinsic value being projected by some many websites are very close to Graham Numbers of the companies I mentioned. So even if I just follow this light will that be aright path for long term?

If intrinsic values can be projected by websites, the website owner would not need to have a website. Instead, they can simply make money buying that company (why share profits with everyone?). In any case, you should probably try and go through some of the fundamental valuation threads on valuepickr to understand the more nuanced part of valuations.

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Btw just to point out, many of these are good companies and i agree with you many of them are undervalued as well. In fact I own some of them as well. The hard part for an investor is to figure out which of these companies are worth owning. Which ones will increase and create value for shareholders and which ones will destroy value?

Some people seek to address this problem by doing a “quant” strategy similar to “magic formula”. That is one option as well if the investor does not want to do research for whatever reason.

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I think we have to understand investment styles in the context of the time in which they operate. Graham used to operate in a time where systematic security analysis was not really much of a profession and stocks were not really as deeply studied as they are today. Simple formulae like Graham number worked well because even great companies used to be cheap.

Fast forward 80-90 years and all kinds of money chases these great businesses. The market is not fully efficient but it is not fully inefficient either. Many businesses (specially ones which are well analysed) are almost always priced near their intrinsic value as determined by the markets distributed wisdom. Opportunities do Exist in times of high pessimism or high optimism but such times are rare.

The key job for a stock picker style investor is to separate the wheat (those top 5-10 or even more companies which we believe will create value for investors) from the chaff (50 companies your filter throws up or which any other filter throws up).

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Imho… Just because you know the intrinsic value, that doesn’t guarantee you of successful investment. You need to see other parameters also. So i don’t think if a website which provides intrinsic values will surely make its owners rich.

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I think Zee Entertainment is one such company which fits the bill quite well. Its well undervalued for a large cap. The only Red Flag I see is the low promoter holding, and their attempts to control the board. Let me know if there are more potholes which I have missed.

Disc : Invested 4% of my portfolio

It’s in my watchlist and it ticks to some of the boxes. But I am not comfortable with this group as a whole. some of the red flags – promoter holding is extremely low @4.77% and Pledged share of 16.38%, borrowing has gone up substantially, working capital is also not great. Also EPS < 20 which should be higher considering the industry they operate in.

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In addition, I would like to add that frauds,money laundering, falsification of sales, profits and accounts in the past were rare and in recent times, even companies of huge size are involved in every kind of fraud eg, yes bank, DHFL,IL&FS. The list is huge and around 50 companies get added to list every year. So the intrinsic valve can not be based only on data but had to necessarily include management integrity and that has to be non negotiable.

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You are right Atul. In my view while selecting companies we should consider at least following:

1.Does company have high debt on its book? High debt means company might be future case for fraud.
2. What is promoters holding? Low holding- low confidence.
3. What is % of shares pledged? High pledge means promoters may exit.
4. How much loans it has given to group companies? It may be possible that company is helping group companies without any benefit accruing to it.
5. How many shares in group companies are owned by it? These holdings does not add much value, if a company invest in group companies instead of retiring costly loans

Whenever I select a company, I keep these points in my mind.