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Negative Enterprise Value Portfolios After One Year

December 09, 2013
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):

Negative%20EV%20Companies.jpg

Including short-term investments yields a bigger list (click to enlarge):

Negative%20EV%20Companies%20-2.jpg

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:

  1. All portfolios beat the market
  2. Portfolio 1 outperforms Portfolio 2 (i.e. all negative EV stocks outperform those with positive FCF only)
  3. Portfolio 3 outperforms Portfolio 4 for the same reason that 1 outperforms 2.
  4. 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 Portfolioportcharts.cgi?&pid=182534&size=medium&i

2. Negative Enterprise Value Portfolio (Positive FCF Only)portcharts.cgi?&pid=182533&size=medium&i

3. Negative Enterprise Value (Inc. Short-Term Investments) Portfolio

portcharts.cgi?&pid=182531&size=medium&i

4. Negative Enterprise Value (Inc. Short-Term Investments) Portfolio (Positive FCF Only)

portcharts.cgi?&pid=182532&size=medium&i

I’m scoring the predictions as follows:

  1. All portfolios beat the market (Right)
  2. Portfolio 1 outperforms Portfolio 2 (i.e. all negative EV stocks outperform those with positive FCF only) (Wrong)
  3. Portfolio 3 outperforms Portfolio 4 for the same reason that 1 outperforms 2. (Wrong)
  4. Portfolios 1 and 2 outperform Portfolios 3 and 4 (pure negative EV stocks outperform negative EV including short-term investments). (Right)

About the author:


Rating: 3.2/5 (5 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 9 months ago
Excellent. Nice follow up. How were the returns distributed among the portfolios holdings? Did all boats rise with the tide or just a few?

So very roughly double to triple the returns of the S&P. Any speculation as to why?

Similar dynamics as the IPO market maybe? :-)

Please leave your comment:


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