Negative Equity Stocks- Is it an Outright Sell?

[BigFatWhale]

Recently, I have been looking up the financials of Oracle to see if it would be a potential shortlist for my watchlist. 

It would not appear in the conventional filter for a value investor, as it has negative equity. So I did further research on the negative equity situation and see what might have led to this. Also, are there other good-quality companies that fall under this category?

Here is the link to the full article:

https://thebigfatwhale.com/negative-equi...ight-sell/

[weijian]

Actually we all know P/B isn't the only metric that value investors look at, isn't it? Value investors also look at P/E, FCF, debt levels, cash conversion cycles, ROE etc. For example, if this company is a negative equity company and thriving, then it probably means that its debt level is high and one should use ROIC (which accounts for debt) to derive a better metric.

It also seems that most negative equity companies that are thriving, are already highly regarded by the market - either due to their capital efficiency (they don't need a lot of capital to operate), great earnings power (sticky business models) or their intangible brand value (normally not captured on BS). So maybe the key is valuation instead?

Domino's Showcases Quantitative Investing Pitfalls, Stock Continues To Defy Gravity

A study performed by Ching-Lih Jan and Jane A. Ou and published in 2012 in Accounting Horizons, for example, found that over a period of 1996-2005, the market even priced negative-book-equity companies higher than positive-book equity companies. The study also found that the correlation between market value and book equity for negative-equity companies was negative.

Another study by O'Shaughnessy Asset Management estimated that negative-equity companies outperformed the market in approximately 57% of rolling 3-year periods from 1993-2007. The arbitrary nature of book equity when it comes to assessing its importance to market value may be even more apparent in the case of Domino's. The company has had negative equity for as long as it has been public, and its returns have trounced the market by more than 5,000 percentage points since 2009

https://seekingalpha.com/article/4479669...fy-gravity