Hi John.
As always, I'm very grateful to you for your detailed thoughts. Thanks!
<<If it makes you feel any better, I've made the same mistake myself several times.>>
Hmmmmm, small consolation, but I'll take what I can get. ;-)
<<This is a tricky part of looking at balance sheets. You always have to look for preferred, and subtract it out by hand in figuring out what the common is worth. To illustrate, in this case they have $11.6 M assets and $7.0 M liabilities, leaving $4.6 M total shareholders equity. The liquidation value of the preferred is $15 M, leaving the common stock holders ($10.4 M) in the hole.>>
OK, I'm kinda thick, so let me work this through. Slap me if I go astray.
In general, there are several broad approaches as to how to value companies. One way to categorize these is to split them into two camps: those that value a company as a going concern, and those that look at it in terms of liquidation value. For example, when one tries to value a company off of a discounted cash flow model (usually using PERs and PSRs as convenient, short hand proxies) he's thinking of the company as a going concern. However, if one thinks of things in terms of PBRs, he's thinking in terms of liquidation; I submit that when one looks at a company in terms of cash per share he is also looking at things from this liquidation perspective. Does this sound right so far?
If this is correct, then looking for high cash per share is an initial screen that needs to be narrowed to avoid the mistake I made. One needs to further look at the claims on that cash in the event of a liquidation. For instance, it becomes very important to see what kind of debt is on the balance sheet (in the case of COCN there's none). But further, and the thing I missed, is that one also has to take account of the preferred since it has prior rights over the common in the event of a liquidation. So, what one would actually like is a stock which has a low price/cash per common share ratio. IOW, as a point of method when looking for these kinds f opportunities, after you've found a candidate with a lot of cash per share, take the cash, subtract the debt, and then subtract the liquidation value of any preferred; take the remainder and divide by the number of common shares outstanding, and that's the important ratio. It would be nice to have a name for that refinement of cash per share ratio. I'll bet there is....
Thanks for firing some neurons (and also to you too, eWhartHog!).
Anaxagoras |
