How can the Net-Net Price be more than the Enterprising Price?

John,

Is Key Tronic Corp (KTCC) a good example of what Graham refers to as a cigarette butt company? It appears that the actual intrinsic value of KTCC is 6.90 and the last close is 4.09 which is 41% below the actual intrinsic value. I'm used to trying to buy in at 30% below Graham's Defensive Price as encouraged to do so by "The Intelligent Investor" but 41% below the actual intrinsic value seems like quite an extraordinarily good opportunity.

My question is mostly why is the "Enterprising Price" of 1.13 less than the Net-Net Price of 6.90? I thought the Defensive Price was the most liberal judgments of a stock's value, the "Enterprising Price" somewhat less demanding and therefore should only be purchased if the price is significantly lower than the Defensive Price, and the "Net-Net" having even
less expectations of it and therefore should be purchased only if it is super dirt cheap which I would think would be even less than the "Enterprising Price," but in this case the "Enterprising Price" is higher (6.90) than the Net-Net Price. I think I saw this in another case as well. Thank you for any clarification on this situation. I hope you are enjoying your weekend. :)

Stocks Discussed: 
Key Tronic Corp (KTCC)

Submitted by Linus Christopher. Created on Sunday 31st May 2020. Updated on Sunday 31st May 2020.

Submitted by GrahamValue on Sunday 31st May 2020

Dear Linus Christopher,

Thank you for your forum post!

There is no reference to the cigar-butt approach in Graham's own books. Buffett does refer to it in his 1989 Letter to Shareholders, but he doesn't give any specific definition for such stocks; other than that they would be characterized by a low market price.

"If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit."

However, the general consensus seems to be that cigar-butt investing refers to what Graham called the Net Current Asset Value strategy; and Key Tronic Corp (KTCC) does meet the criteria for the NCAV strategy.

You're also correct in that the Defensive Price (Graham №) is generally higher than the Enterprising Price (Serenity №), which in turn is usually higher than the NCAV Price (Net-Net).

However, all three prices are calculated using different methods and this is a unique case where a low recent annual EPS has caused the Enterprising Price (Serenity №) to become lower than the NCAV Price (Net-Net). The Defensive Price (Graham №) is not affected as much since the Defensive Price (Graham №) calculation uses the average EPS of the last three years.

Submitted by Linus Christopher on Sunday 31st May 2020

John,

I don't know how to say this without sounding flowery or insincere, but I am absolutely so impressed with your consistent patience and thoroughness and clarity of responses to my questions. You are obviously a brilliant person with an incredible grasp of understanding of Benjamin Graham and now I see, even of Warren Buffett. Thank you! Thank you for your help in pursuing my own version of acting on the advice of Benjamin Graham. I am just today finishing listening to "The Intelligent Investor" for a second time on Audible.com. I am having a great time. Your software program here is making this possible in a much more time-saving way.

Submitted by GrahamValue on Sunday 31st May 2020

Dear Linus Christopher,

Thank you for your kind words and your patronage!

Submitted by GrahamValue on Wednesday 3rd June 2020
trying to buy in at 30% below Graham's Defensive Price as encouraged to do so by "The Intelligent Investor"

This topic is discussed in more detail at Did Benjamin Graham suggest that investors pay 30% or less of the Defensive Price?