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June, 2013


Virgil, a friend of mine with whom I swap investing ideas, asked what enterprise value (EV) means. I did not know. The term and figures for it show up (among other investing sites) on Yahoo's Key Statistics page, illustrated at the link with info on Emerson Radio Corp. (MSN). Within a day or two he had looked it up and offered this concise definition: "Enterprise Value = Market Cap + Total Debt - Cash."

An expanded explanation of enterprise value is provided by Investopedia: "A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents."

Enterprise value is discussed further by investing site The Motley Fool.

In Value Investing from Graham to Buffett and Beyond*, by Bruce Greenwald, Judd Kahn, Paul Sonkin, and Michael Biema, the authors provide an illustration (John Wiley, 2001 edition, pp. 205-207) of how EV can be used in valuing a company's present market value (PMV). In 1998, General Housewares had a per share market value of $11. Mario Gabelli of Gabelli Asset Management calculated, however, that based on its low enterprise value coupled with a high pretax rate of return its PMV should be considerably higher. In fact, by spring of the following year offers for purchase of the entire company resulted in a final buyout price of $28.75 per share.

(*Available online at prices ranging from a free e-reader download to $49.95)

I initially thought that EV, to be useful, needed to be a positive number, or else its negative values would mess up results from other screening criteria, such as EV to Revenue, but I was wrong. It turns out that among the best performing value stocks are ones with not merely low but negative enterprise value.

Virgil suggested then that a look at a company's EV might be a quick means to screen in or out good value investing candidates. It seems he was spot on.

I have since researched enterprise value a bit and found that backtests of low or negative enterprise value stocks show them to outperform the major market averages. Depending on just which standards are used, often the results have been a considerable improvement over market performance. The ratio of EV to EBITDA (earnings before interest, taxes, depreciation, and amortization) seems to be particularly helpful. An EV/EBITDA of 8 or less tends on average to outperform the S&P 500 Index by several % a year. (Cautious investors may want to avoid China-related companies, since their accounting and reporting standards are thought by some to have not been of consistently high quality.)

Here, then, is a current sampling of securities that meet low enterprise value criteria. The group has been further screened to include (as of early 6/19/13) only stocks with debt to equity below one, book value also less than one, positive net income, and a current ratio of 2.0 or above. (Values shown are as provided by commonly available internet sites and should not be used as a basis for investment decisions without one's own due diligence.)

Low Enterprise Value Stocks

Almost Family, Inc.AFAM$185.9 million$148.8 million$20.050.880.54%--3.225.26
Benchmark Electronics, Inc.BHE$1.1 billion$650.0 million$19.970.930.92%--3.905.41
Ballantyne Strong, Inc.BTN$57.3 million$17.3 million$4.100.870.00%--3.362.87
CSS Industries, Inc.CSS$238.6 million$152.7 million$25.150.960.00%2.4%.385.954.09
Maxygen, Inc.MAXY$69.2 million$-11.9 million$2.490.880.00%--31.29-0.57
Emerson Radio Corp.MSN$45.6 million$-9.4 million$1.680.650.11%--6.55-0.79
Photronics, Inc.PLAB$469.5 million$427.1 million$7.700.8230.61%--2.813.77
Silver Standard Resources, Inc.SSRI$560.4 million$273.3 million$6.940.5116.11%--9.594.69
Telenav, Inc.TNAV$203.1 million$14.8 million$5.120.970.00%--4.780.63

I suggest gradually acquiring a portfolio of about 15-25 such assets, holding each two years or till it is up 50% or more in price (net of commissions), whichever first, then replacing those sold (or redeemed in cash buyouts) with ones that meet the initial value investing buy criteria.

While there are no guarantees, buying and selling a group of equities in this way is likely over the long-term to outperform the major market averages.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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