The net asset value per share (sometimes known as the NAVPS for short) is an investment ratio used to find companies trading below their liquidation value. In a totally efficient market stocks should always be priced above their net asset value per share, as it is assumed that companies will get a better return on their deployed assets than if they merely sold them at market value.
Fortunately for us, as Benjamin Graham often points out in his book the Intelligent Investor, Mr. Market is bi-polar and often prices securities incorrectly. But before we talk about the efficient market hypothesis, let’s take a quick example of the net asset value per share.
The formula itself is quite simple. To get the net asset we simply minus total assets by total liabilities:
8,885.90 – 4,837.20 = 4,048.70
To then work out this value per share we simply need to divide this figure by the number of shares outstanding, which in Trinities’ case happens to be 152.20(m):
4,048.70 / 152.20 = $26.60 per share. As of this morning Trinities’ share price was $17.04, meaning that they are trading at a significant discount to net asset value per share.
In an age of immediate transparency where a single tweet can effect the stock price in a matter of minutes, it does not make sense that securities should be priced less than their net asset value per share. Surely this is an inefficiency undiscovered by the market. The Intelligent Investor sums this phenomenon up well by explaining that Mr. Market (Graham’s fictional salesman who knocks on your door each morning offering to sell you shares at various prices) is bipolar and not very good at appraising the real value of a company. When stock prices rise, Mr. Market is happy to sell you stocks more then their value, and when they fall, he will sell them to you at bargain discounts.
An example of this is a company called Inktomi, which in March 2000 Mr. Market valued at $25b, despite them loosing money hand over fist. 2 years later Mr. Market valued Inktomi at $40m, and by the end of 2002 Yahoo acquired them for $280m.
The point is that ‘the market’ regularly over reacts to situations. A poor quarter by company X can lead to a large sell off of their stock, significantly depressing the share price, despite the fact that every company misses a quarterly earnings every now and again, and this has zero impact in the long term performance of the company.
How to Find Net Asset Value Per Share Stocks
We all like a good sale and this is where the savvy investor can buy stocks at bargain prices. The problem has always been how do I find companies trading below their net asset value per share? Well this is where Robur can help. Our terminal include a NAVPS filter which will automatically shows you which companies fit the NAVPS criteria in a matter of seconds, saving significant amount of time and effort.
As always, we urge investors never to make an investment decision based on a single criteria alone. There is often a good reason as to why the stock price has been depressed and further analysis will be needed to ascertain whether or not there are any long term implications to the nature of the business. That being said, for long term value investors, the net asset value per share can be a powerful weapon in your arsenal.