Testing Benjamin Graham’s net current asset value model

The objective of this paper is to empirically test one of Graham’s investment methods based on the net current asset value (NCAV). The NCAV is truly unique, and conservative, and commonly known as the net-net method. The ratio of the net current asset value to market value (NCAV/MV) was employed in this study to test a stock’s performance comparing to the performance of S&P 500 as the market index. We used all stocks in Portfolio123 whose raw data were supplied by Compustat, Standard & Poors, Capital IQ, and Reuters for the period of January 2, 1999 to August 31, 2012. The overall results show that the firms with high net current asset values outperform the market. These results are strong in the up market. It can be argued that the firms with a high NCAV/MV ratio are likely to move toward their fundamental value and generate high excess return because its stock prices are now undervalued. The implications of the study are: (a) a positive NCAV/MV ratio may be a good indicator of the underpriced security; (b) investing in the growth period and avoiding the downturn period leads investors to earn much higher returns from the firms with a high NCAV/MV ratio; and (c) The NCAV/MV strategy requires a longer holding period of the portfolio in order to generate excess returns.