Classic Graham Investing...Outdated?

Graham was a big proponent of what he called "net net" stocks, or stocks trading below their net current asset value (NCAV).

NCAV is basically the net of total current assets less total liabilities.  Said differently, NCAV is the net worth of the firm NOT including any noncurrent assets such as PP&E, goodwill, long-term investments, etc.  Graham's reasoning was that, in the face of a total fire-sale of all the company's assets, only the current assets -- cash or things that can reasonably be converted to cash within a year's time -- could be used to pay down all its outstanding liabilities.  All other assets, even property, would be valued at essentially zero because its value would be irrelevant or too illiquid.

When the NCAV is greater than the firm's market cap (share price x total outstanding shares), the market is implicitly valuing the equity not only less than what the firm can cover with just its cash and near-cash equivalents, but it's even discounting the value of those near-cash equivalents.

Stocks that fit this profile were perfect value investing targets for Graham.  Provided that company was still profitable and not having trouble meeting its financial obligations, it would only be a matter of time before the market would realize the mispricing of the equity and bid up the price of the stock.

Graham would actually go one step further and advise the prudent investor to seek stocks trading at 2/3 or less than NCAV in order to build in a margin of safety that would maximize the chances of preserving principal.

That sounds pretty good!  Why not just build a portfolio of all the stocks trading at 66% of NCAV and just wait patiently for the market to correct its error?  Not so fast...

"Net net" stocks are exceedingly rare these days.  The market has gotten a tad bit wiser since the 1930s or even the 1970s, when Graham revised The Intelligent Investor.  Back then, especially after the Great Depression, the prevailing notion among many, many people was that "bonds are safe" and "stocks are risky".  This nonsense created several opportunities for companies, even well known ones, to wind up trading below NCAV.

Today, it almost never happens.  Check here to see a list of stocks that currently fit Graham's NCAV approach.  Note that the largest market cap stock trading below NCAV while I write this is a mere $132M.  [For comparison, the median market cap for an S&P 500 company is $10.75B, or 81 times bigger.  The smallest S&P 500 company is $1.22B, or 9 times bigger.]  These stocks don't even qualify as small-cap stocks, they're microcap.  Most are even (somewhat derisively) called nanocaps.

This brings up two major concerns that I need to research further:

First, I need to address an issue I touched on in my prior post: are undervalued microcap stocks regularly capable of realizing their intrinsic value?  Large institutions, equity analysts, most people are NOT looking at these tiny companies, which according to Buffett is precisely what we want.  But if almost nobody is looking at them, then who (besides me) is going to buy up these shares?  Eventually something or someone has to jump on the stock and bid up its price.  But who?  I shall research this.

Second, if in fact microcaps tend to remain more or less permanently ignored because nobody is around to buy them, what should I do?  In the 21st century, firms larger than microcap probably never fall below their NCAV.  So if the strict Graham methodology of finding stocks trading below their liquidation value is a more or less outdated strategy, what are my alternatives?  I will explore this in much more detail in later posts.