A year ago I wrote a post on the returns to negative enterprise value stocks.
Zero Hedge screened Russell 2000 companies finding 10 companies with negative enterprise value, and then further subdivided the screen into companies with negative, and positive free cash flow (defined here as EBITDA – Cap Ex). Here’s the list (click to enlarge):
Including short-term investments yields a bigger list (click to enlarge):
Like Graham net nets, negative EV stocks are ugly balance sheet plays. They lose money; they burn cash; the business, if they actually have one, usually needs to be taken to the woodshed (so does management, for that matter). Frankly, that’s why they’re cheap.
Just for fun, I made four throw-away predictions:
- All portfolios beat the market
- Portfolio 1 outperforms Portfolio 2 (i.e. all negative EV stocks outperform those with positive FCF only)
- Portfolio 3 outperforms Portfolio 4 for the same reason that 1 outperforms 2.
- Portfolios 1 and 2 outperform Portfolios 3 and 4 (pure negative EV stocks outperform negative EV including short-term investments)
Here are the results:
1. Negative Enterprise Value Portfolio
2. Negative Enterprise Value Portfolio (Positive FCF Only)
3. Negative Enterprise Value (Inc. Short-Term Investments) Portfolio
4. Negative Enterprise Value (Inc. Short-Term Investments) Portfolio (Positive FCF Only)
I’m scoring the predictions as follows:
- All portfolios beat the market (Right)
- Portfolio 1 outperforms Portfolio 2 (i.e. all negative EV stocks outperform those with positive FCF only) (Wrong)
- Portfolio 3 outperforms Portfolio 4 for the same reason that 1 outperforms 2. (Wrong)
- Portfolios 1 and 2 outperform Portfolios 3 and 4 (pure negative EV stocks outperform negative EV including short-term investments). (Right)
Here are the links to the four virtual portfolios at Tickerspy that track the performance:
- Zero Hedge Negative Enterprise Value Portfolio
- Zero Hedge Negative Enterprise Value Portfolio (Positive FCF Only)
- Zero Hedge Negative Enterprise Value (Inc. Short-Term Investments) Portfolio
- Zero Hedge Negative Enterprise Value (Inc. Short-Term Investments) Portfolio (Positive FCF Only)
See my earlier post on the Returns to Negative Enterprise Value Stocks
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Really interesting to see this. I assume that the pure Neg Ent companies did better because they’re cheaper as a group.
I’m curious to see the chart of the negative FCF firms. With net nets, there doesn’t seem to be much difference between negative and positive earnings companies — if anything net net stocks of companies losing money perform better. I think this is because there’s a more substantial shift in perception vs. positive earnings firms if something improves in the firm’s situation.
Eventually I want to run a test of net nets trading for less than cash and compare those results to a portfolio of neg ent stocks. I have a feeling that those net nets would do better than the Neg Ent firms because net nets trading for less than cash are cheaper (the formula takes into account total liabilities, not just debt).
Evan
Net Net Hunter
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Thanks for following up on this Toby!
I know it’s only a year, but Portfolios 1 & 3 (without positive free cashflow) have a prettier (smoother) chart.
I wonder if that is true over the long term?
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I don’t know. Maybe because portfolios 1 and 3 contain more stocks, so the contribution to the return of the portfolio of any individual stock is smaller, and the portfolio returns appear smoother.
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