Financial Adviser: 5 Low-Priced Value Stocks in 2024 Based on Benjamin Graham's 'Net-Net' Strategy and How to Profit from Them

Value investing has long been regarded as a timeless and proven approach to wealth creation. At the heart of this philosophy lies the enduring wisdom of Benjamin Graham, the father of value investing who authored the widely acclaimed investment book The Intelligent Investor.

Of the various strategies he advocated, one that stands out for its simplicity and effectiveness, is called the Net-Net Stock Strategy, a unique value investing approach that involves identifying and investing in stocks trading at a substantial discount to their intrinsic value, specifically focusing on the company's net current assets.

According to Graham, a net-net stock is a company whose market capitalization is trading at a significant discount to its net current asset value (NCAV).

The NCAV is a conservative measure of a company's intrinsic value. It is calculated by subtracting a company's total liabilities from its current assets. Graham recommended investing in companies where the market price is significantly below the NCAV per share.

By investing in net-net stocks, investors create a built-in margin of safety as they are acquiring assets at a discount to their liquidation value.

Graham believed that certain events or catalysts could trigger a reassessment of a company's value by the market. These catalysts might include changes in management, restructuring, or improvements in the company's operations.

Applying Graham’s Net-Net Stock Strategy, we have identified stocks on the Philippine Stock Exchange (PSE) that are currently trading below their NCAV per share. In selecting the top five net-net stocks in the market, we considered only those with an annual net income of at least P500 million.

The Net-Net Stock Strategy requires a patient and long-term approach. Investors should be prepared to hold these stocks until their true value is recognized by the market.

Graham emphasized the importance of diversification to mitigate risks associated with individual stock investments. By spreading investments across multiple net-net stocks, investors can reduce the impact of poor-performing stocks on their overall portfolio.

Let’s look at the top five most affordable value stocks in the market this year, understand their financial health, valuation and prospects in the future.

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1| Empire East Land Holdings, Inc

Price: P0.125  

Discount to value: 93 percent

Empire East Land Holdings (PSE: ELI) is one of the leading low-to-middle income property developers in the country. The company is 81.7 percent owned and controlled by business tycoon Andrew Tan through his property company, Megaworld Corporation (PSE: MEG).

Some of ELI’s current projects include Empire East Highland City, an elevated 22.8-hectare township at the boundary of Pasig City; The Paddington Place, a four-tower high-rise condominium in Mandaluyong City; Mango Tree Residences, a two-tower condominium in San Juan City; and The Sonoma, a 50-hectare horizontal development in Santa Rosa City, Laguna.

ELI used to be a stock market darling when it was listed in 1996, but when the Asian financial crisis struck in 1997, the stock went downhill from a high of P8.77 per share to a low of P0.10 per share in 2003.

The share price of ELI has never recovered since then despite the steady growth of the company after the crisis. The highest that it has reached over the next 20 years was only P1.21 per share in 2013, which incidentally marked the beginning of its 10-year downtrend.

The fall in ELI’s stock price shrank its market capitalization from P13.5 billion to only P3.0 billion today, while its net income grew by 9.8 percent per year from P299 million in 2013 to P765 million in 2023.

This year, ELI's total revenues for the first nine months of 2024 increased by 3.7 percent to P3.82 billion from P3.68 billion during the same period last year. This growth was primarily driven by a 33.9 percent rise in finance income, which increased from P308.97 million in 2023 to P413.75 million and commission income, which surged by 46.2 percent, reaching P549.57 million compared to P376.02 million in the previous year.  

ELI’s real estate sales, however, the primary contributor to revenues, declined by 4.7 percent, falling from P3.0 billion to P2.9 billion. Despite this, the company achieved a 2.0 percent increase in net profit for the period, reaching P591.19 million, compared to P579.63 million last year.

This improvement underscores the company’s ability to leverage diversified revenue streams, such as finance income and commissions, to offset challenges in real estate sales.

As of September 30, 2024, ELI’s liquidity ratios reflect a robust financial position, with a current ratio of 2.92, slightly higher than the 2.87 recorded at the end of 2023. This indicates the company’s ability to cover short-term obligations with current assets has improved marginally.

The company’s leverage ratios also show stability, with the debt-to-equity ratio remaining steady at 0.58, signifying balanced use of debt relative to equity. The interest-bearing debt to total capitalization ratio decreased slightly to 0.02 from 0.03, which highlights the company’s reduced reliance on interest-bearing debt in its capital structure.

Based on ELI’s 12-month trailing net income, its Price-to-Earnings (P/E) ratio stands at only 2.4 times, which is substantially lower than its three-year average PE of 5.7 times.

If we apply the net-net method to ELI, we can get the total current assets of the company as of September 2024 at P44.5 billion. If we deduct its total liabilities of P18.3 billion, we will get net current assets value of P26.2 billion.

Dividing this by the total shares outstanding of 14.6 billion shares, we arrive at a net-net value of P1.79 per share for ELI, representing a substantial discount of 93 percent compared to its current share price of P0.125.

ELI's substantial 93 percent discount to its intrinsic value offers investors a built-in margin of safety. At a minimum, the stock is expected to double in value in the long term as its PE multiple regresses to its historical average of 5.0x.

Buying ELI at P0.125 or lower means that you will be paying for the company’s current assets only net of all its liabilities and taking its fixed operating assets for free.

2| Cirtek Holdings Philippines

Price: P1.38

Discount to Value: 76 percent

Cirtek Holdings Philippines (PSE: TECH) is primarily engaged in the manufacturing of value-added, highly integrated technology products and semiconductor packages.

TECH's revenues, which are largely driven by exports and customer engagements from Europe and the United States, has maintained a steady growth. Over the past 14 years, the company has experienced an impressive average annual growth rate of 8.5 percent, transitioning from $23 million in 2009 to $72 million in 2023.

The consistent growth in TECH’s revenues enabled its net income to grow by an average of 24.5 percent per year to $8.6 million in 2021 from $963,000 in 2009.

This year, TECH's nine-month revenues decreased by 20.8 percent, dropping from $61.2 billion in 2023 to $48.5 billion in 2024. Consequently, net profit declined by 35.1 percent, from $7.64 billion last year to $4.96 billion. Based on the historical contribution of its nine-month income to full-year earnings, TECH is projected to achieve a net income of $6.2 billion for the year, which represents a 27.9 percent decline from its earnings last year.

TECH's 12-month trailing PE ratio currently sits at just 2.8 times. This figure significantly lags behind its three-year average P/E of 17.9 times.

The fall in TECH’s share price this year by 30 percent from its high in January has reduced its market capitalization to roughly less than P1.0 billion.  If we deduct TECH’s total liabilities of $54.7 million from its total current assets of $120.8 million, we will derive a net current asset value of $66.1 million.

If we divide this by its outstanding shares of 668.5 million, the net-net value per share for TECH would be $0.098 or approximately P5.82 per share at today’s exchange rate. This represents a 76-percent discount to its current share price.

A potential recession in the US and Europe might delay TECH’s short-term earnings recovery. However, the current share price presents an excellent value investing opportunity for the long-term.

With a substantial 76 percent margin of safety, the stock should at least double to P3.26 per share. At this target price, TECH’s PE ratio would be only 6.6 times, significantly below its historical double-digit PE average of 17.9 times.

3| Vantage Equities, Inc

Price:  P0.76

Discount to Value: 74 percent

Vantage Equities, Inc. (PSE: V) is an investment and financial holding company that specializes in diversified investments across the financial services sector. With a portfolio of subsidiaries, the company provides a broad range of financial solutions, including money transfers, bills payment, mutual fund management, and strategic investment products.

One of V’s key subsidiaries, Vantage Financial Corporation, operates an extensive network of over 145 branches and 1,500 sub-agents nationwide that offer financial services such as Western Union money transfers, bills payment, and ticketing.

Another subsidiary, Philequity Management, Inc. (PEMI), is a leading investment management firm that oversees top-performing mutual funds, including the Philequity Fund, Inc., which is renowned for providing competitive returns in equity investments.

V also manages the Philequity MSCI Philippines Index Fund, Inc., focusing on investments that track the MSCI Philippines Index, and the Philequity Dynamic Allocation Fund, Inc., which employs dynamic strategies to optimize returns based on market trends.

V derives about 70 percent of its total revenues from service income, money transfer service and interest income with the balance of 30 percent from investment gains from trading and foreign exchange.

V had considerable fluctuations in both its revenues and net income for the past 10 years. This is largely due to its operation in the dynamic financial services industry, where market volatility, investment risks and external economic factors can lead to substantial changes in both revenue and profitability.

V’s total revenues for the first nine months of 2024 increased by 57 percent to P992 million from P632 million last year. This growth was driven primarily by remarkable gains in trading income, which surged to P383.93 million from P68.48 million in 2023.

Interest income also showed strong growth, increasing to P415.17 million, up by 20 percent from P346.77 million. However, income from mutual funds slightly decreased to P187.70 million, compared to P195.92 million in 2023.

Because of this, V registered a 74-percent increase in its net income to P711.10 million from P409.23 million in the same period last year. This robust growth underscores the company's ability to capitalize on favorable market conditions, particularly in trading activities and interest income, while maintaining cost efficiency.

V’s share price has fallen by as much as 30 percent from its high of P0.96 per share this year to a low of P0.68 per share due to the global market uncertainties. The fall in the share price has driven its 12-month trailing P/E ratio to only 3.8 times, which is roughly half of its historical P/E of 8.8 times.

If we deduct V’s total liabilities of P273.7 million from its total current assets of P12.5 billion, we will derive a net current asset value of P12.2 billion. If we divide this by its outstanding shares of 4.2 billion, the net-net value per share for V would be P2.91 per share. This represents a 74 percent discount to its current share price.

With a substantial 74 percent margin of safety, V offers significant downside protection against the inherent variability in its income and revenue. This cushion provides investors with confidence that the company is well-positioned to weather short-term challenges.

Over the long term, as market cycles turn favorable, the company’s strong equity base and low reliance on debt should enable it to capitalize on growth opportunities and deliver improved performance. When the market conditions align with its strengths, V’s stock price is likely to reflect its intrinsic value.

4| Global-Estate Resorts, Inc

Price: P0.56

Discount to Value: 71 percent

Global-Estate Resorts, Inc. (PSE: GERI) is primarily engaged in the development of integrated tourism and leisure estates and integrated lifestyle communities consisting of residential, retail, hotel operations.

GERI, formerly known as Fil-Estate Land, was listed in 1995. In 2011, Alliance Global Group, Inc (PSE:AGI) led by business tycoon, Andrew Tan acquired a majority stake in the Company and consolidated it under Megaworld Corporation (PSE: MEG) in 2014.

Among GERI’s key developments are Boracay Newcoast in Malay, Aklan, Twin Lakes in Laurel, Batangas, Sta. Barbara Heights in Iloilo, Southwoods City in Laguna and Cavite, Alabang West in Las Piñas, The Hamptons Caliraya in Cavinti, Laguna, and Arden Botanical Estate in Trece and Tanza, Cavite.

GERI's total revenues, where about 80 percent comes from real estate sales, had been growing at an average rate of 12 percent per year from P1.7 billion in 2013 to P8.3 billion in 2023. This consistent revenue growth translated to a 19.1 percent annual increase in earnings, rising from P321 million in 2013 to P1.8 billion in 2023.

GERI's total revenues for the nine-month period demonstrated steady growth, rising by 10.8 percent to P6.6 billion compared to P5.9 billion in the previous year. This increase was primarily fueled by a robust recovery in hotel operations and a significant boost in finance income.

However, real estate sales grew modestly by only 0.2 percent to P4.2 billion, while rental income saw a moderate increase of 4.2 percent to P426 million. Because of this, GERI’s net income grew only by 2.4 percent to P1.5 billion from P1.47 billion last year.  

GERI has maintained a strong liquidity position, with the current ratio at 4.56, slightly lower than the 4.87 at the start of the year. The current ratio measures the company’s ability to cover its short-term obligations with its current assets, and a ratio above 1.0 indicates a favorable liquidity position.

Turning to leverage ratios, GERI’s debt to equity ratio stayed at 54%, maintaining the same balance between debt and equity financing as of last year. This suggests the company has a moderate level of leverage, with debt accounting for just over half of its equity.

GERI’s 12-month trailing P/E ratio stands at 3.4 times, which is significantly lower than its three-year average P/E ratio of 7.8 times. The slowdown in the property sector, particularly condominium sales, may delay GERI’s earnings recovery in the short-term, which could further push its share price lower.

Given ELI’s P/E of 2.4x, GERI’s P/E ratio of 3.4x appears to be on the high end. It is possible that GERI’s stock price could fall further. At P/E ratio of 2.0x, we can probably pick up this stock at P0.39 per share.

If we deduct GERI’s total liabilities of P22 billion from its current assets of P43 billion, we will derive net current asset value of P21 billion. Dividing this amount by its share outstanding of 10.9 billion, we will derive a net current asset value per share of P1.92.

GERI’s net-net value of P1.79 per share currently offers a substantial discount of 71 percent. This is like buying the company at 71 percent discount of its net current assets value of P21 billion and taking the company’s non-current assets worth P20 billion for free.

But with the down cycle in the property sector, which could take some time to recover, probably a couple of years, we can wait for this stock to fall further before accumulating it at a steep discount for the long-term.

5| A Brown Company, Inc

Price: P0.56

Discount to Value: 30 percent

A Brown Company (PSE: BRN) is primarily a property developer with a significant portion of its business, about 90 percent of its total revenues, focused in Mindanao such as Cagayan de Oro City; Intao, Misamis Oriental; Valencia City, Bukidnon; and Butuan City, Agusan del Norte.

In recent years, BRN has diversified its business interest in power generation, water utility, and palm oil production, which contribute roughly 10 percent of its total revenues.

BRN’s total revenues had been growing at an average rate of 19.7 percent, climbing from P551 million in 2017 to P1.6 billion in 2023. This robust revenue growth allowed BRN to grow its net income by 10.6 percent per year from P299 million in 2016 to P546 million in 2023.

This year, BRN’s nine-month total revenues increased by 31 percent from P1.1 billion in 2023 to P1.4 billion in 2024. The primary driver of this growth was the increase in real estate sales, which rose by 30 percent, contributing to 87 percent of total revenues.

However, BRN’s gross profit margin fell from 65 percent to 47 percent. This decline was primarily driven by higher costs outpacing revenue growth, especially in real estate. As a result, BRN’s net income declined by 40 percent from P484.5 million in 2023 to P290.8 million in 2024.

Based on a 12-month trailing net income, BRN is currently trading at a P/E ratio of 4.3 times. This is notably higher than its historical P/E of 3.3 times.

This suggests that the current share price may be overvalued relative to its recent earnings performance, and could potentially decrease to adjust its P/E multiple downward.

If we deduct its total liabilities of P5.1 billion from its total current assets of P6.9 billion, we will derive a net current asset value of P1.88 billion.

Dividing this figure by its total outstanding shares of 2.37 billion, we will derive a net-net value of P0.79 per share, which offers a 30 percent discount at its current share price.

Considering the anticipated deceleration in both revenue and earnings growth due to the current downturn in the property sector, we need a larger margin of safety to make it compelling.

If we price BRN at the same discount of GERI at 71 percent, we can put our target buying price near the P0.23 per share level.