In brief
An investment strategy proposed by US investor and commentator James Altucher that screens the market for potential bargain stocks. In particular, the strategy seeks out companies that are being valued by the market at less than net cash but still have reasonable quantitative and qualitative hallmarks.
Background
James Altucher is an investor, prolific author and entrepreneur who made and lost a fortune during the dot com bubble. Altucher’s interest in investment has resulted in several books, Trade Like a Hedge Fund and Trade Like Warren Buffett, in which he deconstructs and analyses successful trading techniques. He presents his views on life and business in a candid and highly recommended blog.
In the 2005 book Trade Like Warren Buffett, Altucher set out to examine how Buffett had applied the concept of ‘margin of safety’, advocated by his one-time tutor and value investing legend, Benjamin Graham. In it he examines how Graham (together with David Dodd in their book Security Analysis) had sought very conservative protection from failure by buying stocks at prices below their liquidation values. Graham’s strategy became known as Net Net Working Capital and falls under a broader umbrella of seeking out stocks whose market capitalisation is lower than their cash value.
Altucher picked up this concept and proposed his own “Cash Index” screen, which blends quantitative and qualitative measures. It is similar to the Negative Enterprise Value screen, which looks for companies whose cash is worth more than the total value of their shares and long-term debt.
Investment philosophy
Altucher suggests a multi-pronged approach to analysing potential bargain / arbitrage stocks trading below cash in times of market distress (in his case, post the 2001 bubble / Iraq War). In his version, Altucher looks for eight factors, four of which are easily quantified:
- Market cap below cash (i.e. effectively negative EV, assuming cash is net of all liabilities).
- Very low leverage (less than 20%)
- Enough cash headroom to cover the current annual burn-rate, and
- Some stability in revenues and earnings.
In addition to these easily-screenable criteria (which we've implemented), he suggested looking out for more qualitative factors, which would require a qualitative review:
- A reasonable belief that the sell-off in the stock was partly irrational - "Hundreds of Internet companies went bankrupt, but not every company whose shares sold off will go…
