Grahamite Investing and Callaway Golf (ELY)

Ben Graham's style of investing focused on a company's net current assets, or current assets - total liabilities. If the total market cap is less than net current assets, you may have a potential bargain because it signifies that the company's ongoing business is selling for nothing. I sometimes view net current assets as a company's minimum liquidation value because it subtracts out all debts and other liabilities and leaves you with the current assets left over. As an example, let's look at Callaway Golf - ticker ELY.

Looking at ELY's Q3 2009 balance sheet, ELY has 518mil in current assets and 169mil in total liabilities, giving you a net current asset value of 518-169 = $349mil. At the current price of $8.00, ELY has a market value of $520mil, slightly higher than its net current asset value. At this point, Graham would not be an investor unless some other factor significantly outweighed the high market value. However, back in July, ELY had a stock price of $4.80, providing a market value of $310 million which is less than $349mil. Thus, this would indicate a stock in which further research is required for an investment but from just isolating this data, the stock seems to be priced at a bargain level.

An excellent way of comparing companies is to take what I call the net current asset (NCA) ratio. Simply divide the market value by the NCA to get your NCA ratio. The NCA ratio for ELY is currently $520/$349, or 1.49. Thus, ELY is trading at 1.49x its net current assets. Other competitors of ELY are trading at 5x NCA, meaning ELY is priced at a significant discount to that of its competitors.

I've noticed that different industries have very different NCA ratios. For instance, the average technology company is trading at 8x NCA. You'd be hard-pressed to find a Grahamite investment in the tech space :)

I've read a lot about comparing NCA to market value, but I've never seen it expressed as a ratio. By turning it into a ratio, you streamline the process and can then compare companies and industries that have different values for their net current assets and market caps. (As a full disclosure, I currently own ELY)