Many fundamental analysts estimate value by projecting cash flows and then discounting at a rate determined by measuring the beta of the stock. The CAPM and many analysts who use betas to discount cash flows are assuming that risk can be summarized by one number, and that that one number can be determined by observing how the stock price historically correlated with the returns of other stocks.
But let’s do a quick thought experiment to see how ridiculous this is….
Benjamin Graham famously recommended looking at stocks that trade below their net-net working capital (NNWC) value per share (current assets – all liabilities). A lot of modern value investors have talked about this metric as a classic example of buying stocks with a large margin of safety, but also as a dated technique for the simple reason that few securities in recent history have met this criteria.
However, with the precipitous decline of stock markets at the end of 2008 many of these opportunities have reemerged, and it is worth taking a look at this strategy.