Should You Avoid All Stocks With This Negative Metric?

For the past few months I've been running a series of articles that check for possible hidden weaknesses in companies. Today I'll go deeper to see how firms containing one of these negatives actually performed during the recent bear market.

Based on the work of Hewitt Heiserman, my analysis drills into the amount of goodwill and other intangible assets sitting on a company's balance sheet. I also run a check on tangible book value. Heiserman says he avoids companies with a negative value here because they may not hold up well during down periods in the economy. See this article on IBM (NYSE: IBM  ) for examples and more explanation.

Size matters
To get some idea of what we might expect from such companies in future downturns, I constructed a screen that looks back at actual performance from the market high in October 2007 to its very bottom in March 2009.

For all companies with a market cap of $50 million or greater, the results show that those with a negative tangible book value underperformed the market across the board, falling an average of 62% compared to the S&P 500's drop of 55%. But things get more interesting when I rank the negative tangible book value companies by size.


Data provided by S&P Capital IQ.

Finally, here's a look at the best- and worst-performing companies that were available on U.S. exchanges at the start of the study period:

 

Mega Caps (6 total)

Procter & Gamble (NYSE: PG  )

(34.0%)

Rio Tinto (NYSE: RIO  )

(58.5%)

   

Large Caps (121)

AstraZeneca (NYSE: AZN  )

(9.6%)

General Motors (NYSE: GM  )

(96.5%)

   

Mid Caps (292)

Church & Dwight (NYSE: CHD  )

1.4%

Avis Budget Group

(98.3%)

   

Small Caps (490)

Compass Minerals International

63.3%

BearingPoint

(100.0%)

   

Micro Caps (514)

NCI

35.4%

Cell Therapeutics (Nasdaq: CTIC  )

(99.9%)

   

Data provided by S&P Capital IQ.

Foolish bottom line
While interesting, it's not surprising that, on average, the larger the company, the better it performed during the nasty bear market. It is a bit surprising, however, to see that large- and mega-cap companies with negative tangible book values actually outperformed the broader market.

This article provides a look at just one down period in the stock market, and is not meant as proof that similar results will occur in all bear markets. Still, as I continue my series, I'll give less negative emphasis to large companies with negative tangible book values, including IBM in the example I mentioned above.

Fool analyst Rex Moore tweets but is not a twerp. He runs a real-money Rising Star portfolio based on his screens. Of the companies mentioned here, he owns shares of Procter & Gamble. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 30, 2011, at 3:06 PM, pondee619 wrote:

    So, Micro caps and Small Caps with a negative tangible book value did worse as a group than the other groups but had the best overall performers ? They also had the worse performers , and I'm assuming had more under-performers than over performers. BUT, if you wanted to make money on negative tangible book value stocks the place to be was in small and micro caps, IF you were able to pick the right ones. What does negative tangilbe book value when compared with a company's size tell us?

  • Report this Comment On November 30, 2011, at 4:55 PM, TMFOrangeblood wrote:

    Here's some more data that might round things out for you, pondee. Of the 490 small caps, 24 did not lose value. Of the 514 micro caps, 14 didn't lose value. Since it would have been highly unlikely to have picked one of those winners, I'd much rather have been in a large cap.

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