Skip to main content
No. of Recommendations: 30
Thesis: A high ROE is good. So an infinite ROE has to be better, right?

A firm that can make money with no net book value at all is often a great long run investment.
Historical examples include Coke, Moody's, Yum, Dunkin', Autozone, IBM for a long time.
Most often they are reasonably mature firms who have had time to pay out all their equity as dividends and still keep
earning because they have asset-light businesses or earnings so steady they can afford to fund themselves with >100% debt and <0% equity.
They often have strong pricing power and strong resistance to the entry of viable competitors.
(if they didn't, you could open a profitable competitor with no upfront capital!)

This was inspired by my high ROE screens starting with the VL database. Great hunting ground.
But if a company has positive earnings but negative book, they generally just divide the two and give you a negative ROE figure.
This is arithmetically sensible but probably not what you're looking for from an investment point of view.
All my VL high-ROE screens were missing these picks.

So, the strategy of the day is to look for only these oddities.

Value Line 1700 set of stocks.
Find those with:
Negative or zero book value per share, positive trailing-four-quarter earnings, and positive "Current EPS"
On average there are about 31 stocks meeting those three criteria, though occasionally as few as 4.
Buy equal dollar amounts of the 15 stocks with the highest projected EPS growth in the next 3-5 years.
If there aren't 15 of them (average is 13.6), pad the portfolio with some SPY so no stock position is over 1/15th of the portfolio.
Hold for a month. Repeat.
Very low turnover; less than one substitution per month.

From January 2001 to April 2021, this beat SPY by 11.4%/year after 0.4% trading costs.
Remarkably steady too, all things considered. About 3/4 the risk of the S&P on my preferred DDD3 metric. Last 12 months up 122%.

Top 20 is almost as nice. Backtest return about 2.9% lower, but somewhat steadier results. Lower risk metric, lower standard deviation of rolling year returns, milder worst rolling year.
And of course lower company-specific risk.
In fact, the final sort isn't really needed that much. Just buying all of them with negative book and positive earnings measured both ways works pretty well too.
It helps to at least require that PEG be positive.

For a sense of what it finds, I believe the current picks would be:

The current top 15 have an average PEG of 24.2%.
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.