Do Benjamin Graham’s “Sub-Working Capital” Stocks Still Exist?

Examining whether Benjamin Graham’s criteria for a high margin of safety can still unearth bargains.

King Cyrus Handing Over the Treasure Looted from the Temple of Jerusalem, Ferdinand Bol, 1655-1669, oil on canvas (Rijksmuseum)

A typical sports media time-filling debate topic is to compare players from different eras. It poses questions like “Would LeBron James have averaged 50 points a game if he played in the 60s?”, or “What would Bill Russell look like in today’s NBA?”. 

They’re fun conversations, but they ultimately don’t have a real answer. Watch a game from any sport now versus 50-60 years ago and you might think you are watching entirely different sports. 

These massive changes likely mean there are events in sports history we will never see again. For example, I feel pretty confident saying no one will ever match Wilt Chamberlain’s 100-point game. 

As I re-read Benjamin Graham’s The Intelligent Investor, some passages make me ask the same. Has the “game” of investing changed so much that some of these principles or tools are not achievable anymore? 

One stock evaluation criterion Graham highlighted was the “sub-working capital” stock. Another label for these unique stocks is a “net-net” stock. Sub-working capital companies are ones where the company’s current assets – such as cash, short-term investments, receivables,  and inventory – are worth more than the total value of its outstanding liabilities and market capitalization capitalization. 

As Graham puts it: 

This would mean that the buyer would pay nothing at all for the fixed assets – buildings, machinery, etc., or any good-will items that might exist. 

This sounds great…in theory. A company trading for such a steep discount would likely provide any investor with a wide margin of safety. 

Here’s the question I couldn’t shake when I saw this segment. Do companies even trade at such deep discounts anymore? It’s been more than 50 years since Graham wrote that passage. Today, way more investors are actively and passively participating in the market. There are almost as many investment firms, asset managers, and hedge funds as publicly traded companies. Surely, with this many people (and algorithms) combing the market for value, there is no way stocks to such absurdly low valuations.

Right?

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The best way to answer this question is to use some of Koyfin’s easy-to-use stock screen and watchlist tools. It is one of the many functions I use daily on the Koyfin platform. It allows me to create watchlists like a Benjamin Graham-themed “sub-working capital” list to track it and many other portfolios. Then, I can review a decade of financials, compare companies on various metrics, pull up conference call transcripts, and much more.

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Disclaimer: I have an affiliate partnership with Koyfin and receive compensation if you sign up via the link above. It helps me fund this endeavor. I would still recommend using it even if I didn’t have this partnership because it’s an awesome product, but I’d be stupid to turn down a revenue opportunity. You get a discount, Koyfin gets new business, and I get a commission. Win-win-win).