How can I find negative enterprise value companies is a question we have received from a few deep value investors, so here is a short article to show you exactly how.
Why negative enterprise value companies?
Why look for negative enterprise value companies you may be thinking?
For a company to have a negative enterprise value it has to have more cash on its balance sheet than its market value and debt. This means there is a high probability that the company is very undervalued and worth taking a look at, especially if you are a deep value investor.
Does the strategy work? Yes! +50.4% per year
Before I show you exactly how to find negative enterprise value companies I am sure you first want to know if it works.
The best study I could find
The best study I found looked at the performance of negative enterprise value companies trading in the United States over the 40 year period from March 1972 to 28 September 2012.
The average yearly return across all companies was 50.4%.
This does not including trading costs and taxes but still very high I am sure you will agree.
Ideal strategy for the small investor
The backtest also found that a negative enterprise value investment strategy is the ideas strategy for small investors like us.
Because Alon found that 70% of the ideas were companies with a market value of less than $50 million, far too small for the strategy to be of any interest to hedge funds or even normal investment funds.
How you can find negative enterprise value companies
The screener makes it very easy to find negative enterprise value companies as we have already saved a screen you can load with only a few mouse clicks.
Your value analyst
Tim du Toit