The deep value investor often cares little about the quality of the company she buys, rather she cares primarily about the value of its tangible assets minus its libailities. It is not uncommon for a deep value play to have a Price-to-book ratio well below 1.0 and for the company to have more cash and cash equivalents on hand than its market capitalization. Other metrics deep value investors will look for include a price to cash flow below 10. Many of these companies are in dying or obsolete industries or have experienced other adversity such as accounting fraud, negative litigation or forced selling. The deep value investor looks at these events as catalysts for potential mispricing.
Use to Investors
Deep value is a path fraught with peril but one which potentially holds huge rewards. It's not uncommon for many deep value companies to go completely under. The higher risk profile of most deep value opportunities makes proper diversification all that much more important to the deep value investor.
When a company trades at a negative enterprise value (basically they have more cash than their market cap), the market is saying that it believes the company will not survive. Thus a deep value investor has to be prepared to have a long-term horizon and strong emotional fortitude for dramatic price swings. The deep value investor also assumes that he or she will get a fair shake if the company goes private or out of business, which is why many buy stocks below their potential liquidation value with a large margin of safety. True deep value investors will often miss out on great bull market returns as few stocks will meet their criteria during those times.
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