Trading below Cash strategy

Trading below Cash strategy

James Altucher Trading Below Cash is a bargain investing strategy loosely based on an approach described by US investor and writer James Altucher in his book, Trade Like Warren Buffett. This is a deep value strategy that Altucher found was highly effective in periods of market distress. He acknowledged that stocks that are priced at less than the value of their cash present a challenge to investors. It is difficult to get an accurate view of how much cash is actually in a business, plus they may have broken business models or dis-incentivised management. The strategy looks for stocks with a market cap below cash, low debt, sufficient cash to cover the annual burn-rate and some stability in revenues and earnings. Altucher wrote: "There is always the danger that management doesn't care about the shareholders but instead enjoys sitting on the assets of the company and using it for their personal benefit. Diversification is the tool that we can use to reduce the risk of corrupt, or at best, uncaring, management.?

Criteria
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:

1. Market cap below cash (i.e. effectively negative EV, assuming cash is net of all liabilities).
2. Very low leverage (less than 20%)
3. Enough cash headroom to cover the current annual burn-rate, and
4. 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:
5. 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 bankrupt".
6. Favorable arbitrage analysis - "Where the company has already accepted a takeover offer, we want to make sure that owning the shares right now still has a high likelihood of having a favourable annualized return".
7. Insider buying. "While not a requirement, it is nice to know that senior officers and directors in the company feel as we do".
8. Institutional ownership. "We like to see mutual funds with above-average track records that focus on value opportunities swooping down onto these opportunities".

This strategy uses the following checklist:
Mkt Cap ?m > 0
Debt To Assets < 33
EPS > EPS PTTM
Sales (Local) > 0.9 * Sales (Local) PTTM
Price to Cash Net of Burn < 1
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