Negative EV Backtest?

I was wondering if anyone's found effectiveness in negative enterprise value (NEV)? According to previous TIP guests, Wes Grey and Toby Carlilsle both love the EV/EBIT which has been renamed Acquirer's Multiple in their research. However, any business that sells at NEV seems to be brought up less often in their research, for good reason. For starters, there are far less companies selling at neg EV, currently only 93 stocks pop up on a simple screen. So, I did some digging and found a decent backtest:

Moreover, of the ~26.5k stocks selling at NEV - 70% had Market Caps < $50M since 1999. Wes Grey refers to these as "micro-crap" in his research on the subject

Grey concluded:

1. After you eliminate the micro-crap stocks, you end up being invested in a few names at a time (sometimes you go all-in on a single firm!)
2. Sometimes the strategy isn’t invested.
3. The amazing Bueffettesque returns for the “all firms” portfolio above are exclusively tied to micro-craps.

There's isn't a ton of transparency on how Wes is determining quality but we see from the first backtest countries like China and Taiwan have less veritable NEV than the developed world. Stocks from France, Israel, and Ireland had the highest 12 month returns. So scrapping those firms would dramatically improve CAGR and save you from shadow company scandals reduce bankruptcy risk.

This cant' be Xanadu, so what am I missing??

With 70% of all NEV companies under $50M - would the shear size of most quant shops be unable to capture micro-cap returns - leaving money on the table? The first study also finds: "the portfolio's maximum drawdown of 72% would really shake the nerves of deep value investors. Sometime during your holding period, you would have watched your portfolio erode in value by nearly 3/4ths. This is an earth shattering drop that would have tested the confidence of even the strongest deep value practitioners." But anyone running a simple DJIA/SPY trend line, liquidating below a MA, would hardly suffer this fate. The strategy may not be great for Buffett or Icahn, but seems like a useful play for those 99%.

Thoughts and critiques greatly welcome!



  • Hi there J,

    I was running a portfolio of NEV stocks for a while but wound it up as the volativity was simply too much to stomach. In hindsight I should have perhaps persisted with it for longer to see what the long-term returns would be but it turns out I do not have nerves of steel. The emperical data does indeed suggest that this strategy can yield exceptional results but the volatility is a lot to handle. Yes, there is value to be found with smaller companies trading at NEV as larger investors are unable to operate in these corners of the market but the flip side of this is that one is dealing with highly illiquid stocks with large bid/ask spreads and much less coverage, oversight and regulation. If one is to employ this method due dilligence is key. I discussed my strategy in this thead here;

    I think if one is going to employ this approach one should study the investments Warren Buffett made in his partnerships days of the 1950's, investments such as Sandborne maps and so forth.

    Therse essentially two ways to approach these deep value plays, either take the Walter Schloss approach of buying a basket of deep value stocks or take the early Buffett approach of being more selective and concentrated with the deep value stock picks but really drill down into each one and only go in on those which are no-brainers such as the aforementioned Sandborne Maps.


Sign In or Register to comment.