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I had completely forgotten about a test portfolio that I started in March. **Negative Enterprise Value Stocks**.

In March, I was thinking about what other strategy would perform very well in a bull market. Back then net nets were plenty and I knew that extremely cheap stocks would do well as prices had to revert to the mean eventually. But my concern was that if the market rose too quickly, the universe of Graham’s net nets would disappear just as quickly and a new strategy would be needed.

Enter cheap stocks in the form of Negative Enterprise Value.

#### Negative Enterprise Value Formula

(Magic Formula Investing Definition)Enterprise Value = Market Capitalization + Total Debt – Excess Cash

Excess Cash = Total Cash – MAX(0,Current Liabilities-Current Assets)

(Standard Formula)Enterprise Value = Market Capitalization + Total Debt – Cash and Equivalents

Since enterprise value accounts for debt and subtracts the excess cash from the equation, if the formula above results in a negative number, the conclusion is that the company is loaded with excess cash, hence a cash rich company trading for less than it’s value.

If you look at NCAV stocks in the **Graham cheap stock screen**, you will see that many companies are loaded with inventory or receivables, but a company with negative EV will have a higher percentage of assets in cash. Hence a higher quality of assets.

#### Market Crushing Strategy

Like net nets, I’m convinced that in a bear market, negative enterprise stocks will outperform the market by a big margin. I admit the actual test portfolio has a lot of flaws but my logic tells me that a company with more cash than it’s market cap and total debt combined is a formula for out-performance.

Below is the table of how negative EV stocks performance since March. Remember that I had completely forgotten about this so I didn’t sell or add to it. These were just a group of stocks that I felt had valid businesses that were not going to go bankrupt in the recession.

## Negative Enterprise Value Stocks

Ticker | May 25 2009 | Dec 31 2009 |
---|---|---|

TUES | 523.81% | 293.65% |

GSOL | 69.75% | 82.63% |

ZINC | 65.16% | 205.97% |

HSII | 34.22% | 120.15% |

TLF | 27.37% | 94.74% |

BBW | 10.46% | 20.92% |

DIVX | -2.91% | 13.10% |

-ve Enterprise Stocks Combined | 103.98% | 118.74% |

S&P500 | 23% | 58.03% |

#### Stocks Entering 2010 at Negative EV

## 2010 Negative EV Stocks

Ticker | Market Cap (M) | Enterprise Value (M) | Price |
---|---|---|---|

HCII | 50.6 | -38.6 | $7.80 |

ATV | 140.1 | -1.5 | $4.73 |

ACTS | 207.2 | -0.016 | $2.41 |

CAPS | 29.3 | -10.5 | $0.72 |

CHCG | 25.8 | -2.5 | $0.50 |

CMM | 62.7 | -110.3 | $2.63 |

FMCN | 2100 | -209.1 | $15.85 |

FOLD | 89.8 | -1.1 | $3.97 |

GRVY | 45.3 | -12.7 | $1.63 |

IDT | 75.6 | -17.4 | $4.85 |

INSM | 96.2 | -18.7 | $0.77 |

MTE | 967 | -37.6 | $3.07 |

MYRX | 123.2 | -33.5 | $5.03 |

NCTY | 202.3 | -79.8 | $7.22 |

NINE | 62.2 | -30.1 | $1.74 |

PDII | 68.5 | -7.8 | $4.82 |

QXM | 171.3 | -44.3 | $3.66 |

SCMRD | 593.8 | -49.4 | $20.91 |

TRID | 117 | -27.7 | $1.86 |

FMCN, CMM, NCTY, SCMRD, MYRX look very cheap indeed.

I’ve put this exact list of stocks in an investment tracking portfolio so it will be interesting to see the performance of this group at the end of the year.

#### Disclosure

I own INSM, GRVY, PDII at the time of writing.

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Good work on this. Happy New Year’s – I hope it’s a prosperous one!

.-= Doug´s last blog ..Best and Worst Banks According to Forbes =-.

it appears that your spreadsheets does not pick up CMM’s data correctly?

Thanks Doug.

Moneymaker,

CMM has 2 years of historical data so calculations won’t be correct.

Hi Jae

Ran the Yahoo screener using the criteria set out in your March email but results are different than those posted above (both in population and enterprise value). Grateful if you could explain the discrepancy.

I didn’t use the yahoo screener this time.

Used the NYT screener. Found that it had more stocks in the database as it included OTC stocks as well.

I have a question about the formula on Excess cash. Does total cash means Cash flow from operation ? 2nd, if current assets is greater than current liabilities then Excess cash = Total cash – 0 ?

1. Total cash is cash and equivalents.

2. Yes you are correct.

Hi Jae,

I see many of your stocks in the neg. enterprise value are actually foreign stocks. I doubt if the currency conversion is correct, because stocks like IMOS seem to have far more debt than cash.

Thanks,

Zehua

In your excess cash formula you assume that the company has

someamount of excess cash. Wouldn’t a better formula be:Excess Cash = MAX(0,Total Cash – MAX(0,Current Liabilities-Current Assets))

As I’ve written it the formula will result to “0” for companies that have no excess cash whereas your formula will generate a negative number (the excess cash shortage). Or should we include the cash shortage?

For example I was reading Joe Ponzio’s article on JTX. If I run your excess cash formula for the year ended 4/2009, I get negative $41 million. With my formula, it calculates to zero. Which is right?

@ Dom,

Yes that is the formula for excess cash that I used in following posts.

Enterprise Value is the firm value purchaser will buy. If a firm have a negative enterprise value, does it mean that purchaser can buy it free plus getting additional cash without having to pay anything?

Why a firm have more cash, the enterprise value is lesser. Why company got to sell for less when they are cash rich?

Thank you.

Enterprise Value is only a theoretical term of how much value there is in the enterprise.

If a real business had a horde of cash, that amount would be included in the buying price, but with enterprise value, it is subtracted since it isn’t adding to the “enterprise value”.

If you go through the formula, you will see why a firm that has lots of excess cash will have a lower enterprise value.

I fail to see the logic of this “Excess Cash” calculation if “Current Asset” includes “Total Cash and Cash equivalents” by definition. (If there is an update somewhere else to address this, please let me know. Thanks.)

I suppose the rationale of the Excess Cash calculation is that IF Current Asset (excluding cash, i.e inventory, investment assets) cannot cover the current Liability, reduce Total Cash by this amount otherwise all Total Cash is Excess Cash.

If “Current Asset”(including Total Cash) is less than Current Liability, that means with all cash and other assets on hand are NOT enough to cover all current liabilities. Therefore, there should not be any “excess” cash to speak of.

Could you clarify?

(formula of my understanding: Excess Cash=Total Cash-Max(0,Current Liability-Current Asset[excluding Cash and Cash equivalents])

Thanks.

Teaze