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Net Current Asset Value Investing: Graham’s NCAV-to-Market-Value Rule

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Summary

The net current asset value (NCAV) rule compares a company’s current assets, less all liabilities, with its market value; it excludes long-term assets. Graham’s rationale is that a sufficiently large discount may offer liquidation-value protection. The page’s example screens London Stock Exchange stocks for an NCAV-to-market-value ratio above 1.5, forms an equally weighted portfolio each July, and holds it for one year. The strategy is long-only and concentrated in deeply discounted stocks, some of which may be financially distressed.

A cited study of UK stocks from 1981 to 2005 reports significantly positive market-adjusted returns for qualifying stocks, including annualized returns up to 19.7% over five-year holding periods. It says the premium persisted after accounting for company size and was not explained by CAPM or the Fama–French three-factor model. Other cited work cautions that size adjustment can reduce excess returns to approximately zero. These findings are historical and conflicting; the page also notes that long-only value exposure is not a reliable hedge in bear markets.

Key ideas

  • NCAV is current assets minus current and long-term liabilities, while excluding long-term assets.
  • The example buys London-listed stocks with an NCAV-to-market-value ratio above 1.5 and rebalances annually.
  • Equal weighting and a one-year holding period define the page’s simple implementation.
  • The cited UK study reports a historical premium, including after controlling for size and common risk models.
  • Other research finds that size adjustment can remove much of the apparent excess return.
  • Distressed holdings and equity-market exposure limit the strategy’s defensive appeal.

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EquitiesFactor investingBacktesting

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.