The Strategy

Shadow Valley Investing is a quantitative investing blog which will present you a negative enterprise value momentum strategy.

The articles on this page are written as bias-free as possible to leave room for your own thoughts.

My humble self will invest in every presented stock.

This article will show you my thoughts on the strategy and deliver transparency why I think it´s a good idea to invest in a negative enterprise value momentum strategy:


    1. The reason why I use this quantitative investing approach is mainly to prevent biases. A prime example of that is a study from that person who put quantitative investing on the map: Joel Greenblatt. Quickly summarized, he wanted to test if his, so-called “Magic Formula”, which selects 20 stock after fundamental criteria, can be beaten through individual stock picking from the universe of those 20 given stocks.
      As you may expect the whole portfolio (the 20 quantitative selected stocks) outperformed the “stock pickers” by an amazing 25% (and the S&P500 by around 20%).
      To put it in simple words: for the average investor, its pretty difficult to beat the market through stock picking and most of the time to you do more damage than good.
      As the saying goes: Sometimes less is more…
    2. A negative enterprise value based strategy is a special form of a quantitative value strategy. It´s basically picking companies which have currently more cash per stock sitting in their bank account than a single share costs. That means you get, for example, 1 dollar for 80 cents. Which theoretically makes no sense.
      The reason why they are so cheap is, as you may imagine, they have broken businesses or are too small to be covered. They typically burn cash, have to settle lawsuits, are cyclical, have bad news etc.
      Sometimes those stocks getting punished from the market so badly they end up with incredibly cheap valuations and some with a negative enterprise value. Be aware, some of those companies go bankrupt or decline even further. The key question is though did a decline or an increase in the stock price happen more often and if so: by which percentage?
      Since none of us can look into the future, the only thing that we can do is look in the past and fortunately, a person called Alon Bochman has done that for us. The backtest he has done clearly shows that the good scenario happens more often than the bad one and we end up with a hypothetical return of 50.4% per year in the timeframe between 1972 and 2012.
      As you can see another advantage why this strategy may work so well is that this strategy fits more the individual investor since you got a lot of small cap stocks in which the institutional investor is, most of the time, unable to invest in.
      Another reason why people avoid those stocks is, it can be very hard to invest in them mentally since you tend to read mostly good stuff about other stocks in the market.
      Additionally, most of the time while the normal market is soaring up it can happen (more often than you think) that your value stocks go down or don’t move in any direction at all for very long periods of time.
      Patience is key and at times, its easier said than done. Don’t forget just because there is more cash in the bank doesn’t mean that the stock will reach its intrinsic value.
    3. The third criteria is momentum investing and it´s quite a phenomenon to me. As I´ve said before we can´t predict future returns but according to studies, momentum investing does that in his own kind of way: Stocks that have performed well in the past months will perform better than the market average in the future. Potential reasons why and a more detailed explanation is given by this paper from Jyske Capital at page 5.
    4. Additionally, the stocks will be rated after their Piotroski F-Score. The F-Score determines the financial strength of a company. This will be used to separate financial stable and strong companies from the weak ones. This should potentially improve returns and reduce drawdowns as shown by multiple backtests. One example would be from Piotroski himself. He tested value stocks (stocks with low price to book value) with a high F-Score compared to value stocks with a low F-Score. Results were that he would have increased the returns by 7,5% just by only investing in value stocks with a high F-Score.
    5. To prevent home bias in investing, we invest in global markets.
      Excluding China. As you can see in the negative enterprise value study from above  China performed extremely bad due to fraudulent accounting (at that time) in the small-cap universe.
    6. After 12 months every stock will be reevaluated if it still meets all the criteria if not the stock will be sold.


After filtering all the stocks with the criteria mentioned above I´ll end up with a list of companies. I´ll present you one each week unless there are no new companies to present.


Disclaimer:  This blog is for informational purposes only. Everything on this blog represents my personal opinions or the personal opinions of others and should not be construed as financial advice. Talk to a professional if you need specific financial advice. Past performances may not be indicative of future results.
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