Corporate Anorexia

As I looked at replacement candidates for my portfolio, I ran across many companies with negative tangible net worth.  Knowing that intangibles often have value, I looked for the gap that should exist between free cash flow (earnings, less depreciation, amortization, and capital expenditure) and earnings, and more often than not, it was not there.

Ugh, as a buyside insurance analyst, I often encouraged management teams to not buy back stock, but build up capital against contingencies.  It was a contrarian point of view, and not listened to for the most part.

I understand the troubles that come from managements that keep too much of a reserve on hand.  That’s not the problem now.  In the bust phase of the credit cycle, companies with more reserves do better.  The disciplines that minimize net working capital are worthless now in the bust phase.

As I have said before, the boom-bust cycle cannot be repealed.