From the CFA Institute's Inside Investing blog:
Value investing is about finding and buying a bargain, a dollar
selling for 70 cents or less. One of the most tantalizing apparent
bargains offered by the stock market is the negative enterprise value
(EV) stock: a stock that is trading for less than the net cash on the
company’s balance sheet.1
Buying a negative EV stock seems like a no-lose proposition: Imagine a
house selling for $1 million with a safe in the basement that contains
$1.2 million in cash. Why would anyone offer up such a deal? If you find
one, should you take it, or write it off as too good to be true?
To answer this question, I investigated the performance of all
negative EV stocks trading in the United States between 30 March 1972
and 28 September 2012. I started with balance sheet data from Standard
& Poor’s Compustat database and merged these data with price data
from the database maintained by the Center for Research in Security
Prices (CRSP). I then calculated historical enterprise values for every
company every month, as well as matching forward 12-month returns. For
example, Microsoft’s enterprise value on 31 August 2011 was $182
billion, and MSFT’s 12-month forward return from 31 August 2011 to 31
August 2012 was 19%. This is a total time-weighted return, including
dividends and price appreciation.
The enterprise value is based on
Microsoft’s 2011 Q4 report, which was released on 21 July 2011, making
it 41 days old on 31 August 2011. The merging process ensures that all
fundamental data have been published to the market at least five days
before they are used in EV calculations so as to minimize look-ahead
bias. After this math was done, I filtered the dataset to include only
negative EV stocks.
I found 2,613 stocks that at one point or another traded at a
negative enterprise value between 1972 and 2012 (Microsoft,
unfortunately, was not among them). The list has one entry per
stock-month. That is, a stock that has traded at a negative enterprise
value three months in a row will appear on the list three times. Each
time is a different investment opportunity with its own forward 12-month
return. The average stock spent 10.17 months (not necessarily
consecutive) in negative EV territory. Thus, the list shows a total of
26,569 opportunities to invest in negative EV stocks.
The average return across all 26,569 opportunities was 50.4%. That
is, if you had diligently watched the market over the last 40 years and
invested $1,000 into each negative EV stock each month, your average
investment would be worth $1,504 after holding that investment for one year, not including trading costs, taxes, and so on. Not bad!...MORE
HT:
Greenbackd
