Wednesday, December 5, 2012

Ben Graham Net Nets in the Current Market: Buy Cash at a Discount

***Warning*** This is among the most dangerous strategies an investor can pursue ***Warning***
From ZeroHedge:
Buy Cash At A Discount: These Companies Have Negative Enterprise Value
With humans long gone from the trading arena and algorithms left solely in charge of the casino formerly known as "the stock market", in which price discovery is purely a function of highly levered synthetic instruments such as ES and SPY or, worse, the EURUSD and not fundamentals, numerous valuation dislocations are bound to occur. Such as company equity value trading well below net cash (excluding total debt), or in other words, negative enterprise value, meaning one can buy the cash at a discount of par and assign zero value to all other corporate assets.

Typically negative EV companies are associated with pre-bankruptcy cases, usually involving large cash burn, in other words, where the cash may or may not be tomorrow, and which may or may not be able to satisfy all claims should the company file today, especially if it has some off balance sheet liabilities.

In other far more rare cases, some companies may trade with negative EV even if they have positive LTM free cash flow (EBITDA-CapEx). Usually these arbs are rather well hidden, and certainly not within the roster of the far more popular S&P500 companies. We did a quick CapIQ search of all Russell 2000 companies (avoiding microcaps) for whom Net Cash > Market Cap. There were a total of 10 companies among the universe of 2000 that fit these criteria. We then further subdivided the category into companies with negative (far less valuable) cash flow, and positive cash flow.

There were just 4 companies in the last category. They are highlighted in the table below.

And if one includes short-term investments to the cash and equivalents one gets the following slightly expanded list:

Needless to say, those seeking absolute arbitrage opportunities in which a company has no cash bleed (assuming there are no hidden landmines in the Income Statement or Balance Sheet), could survive as a going concern and is retaining earnings right to the bottom line, and in which one can buy the cash at a discount, and get any other residual asset value as a gift, a good place to start looking is with a basket made up of CECO, IMN, IQNT and MAXY.