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Ancora seeks to purchase ownership
positions in companies whose current market values are less than
their private market values. As the first step in determining
private market value, Ancora focuses on a company's financial
fundamentals and valuation. Ancora examines and forecasts an investment’s sales, earnings
and cash flow trends, with a view toward the economic realities
of the business. Balance sheet and cash flow analysis is conducted, with a focus on capital requirements, proper
capitalization and tangible asset value. These factors are then
weighed in combination with a company’s current valuation and
growth potential.
The underlying question we ask
ourselves is always the same. "Would I, using my own
capital, buy the entirety of this company at the current stock
price?" While not sufficient to provide an answer, a
company's value relative to its financial metrics is a key
consideration in answering this question.
Our valuation screening focuses on
two situations:
1. Companies trading at a
significant discount to their liquidation or going-concern
value. Certain issues may trade below tangible book value. This
can occur in times of broad market pessimism or Wall Street
consternation with a company's near-term outlook. Other
companies have hidden assets that are not reflected in the
company's financial statements, such as investments in private
companies or understated real estate values, which, if properly
valued on the balance sheet, would result in the company trading
at a discount to tangible book value. Ancora works to understand
catalysts that will unlock the value of the target company's
assets, although we will also buy based on a company
being too cheap to ignore.
2. A company that is trading
below the discounted value of its future free cash flows. We
subject these types of investments to financial analysis that
focuses on quantifying a company's excess cash flow - cash flow
from operations less investments necessary to expand and sustain
the business, such as maintenance and growth capital
expenditures. Companies can use excess cash flow to enhance
shareholder value, by buying back stock, paying dividends,
paying down debt and making strategic acquisitions. The
underlying tenet supporting this approach is that the ultimate
function of a business enterprise is to generate free cash flow
to its owners.
Our initial screening to
identify companies with undiscovered value takes several forms:
- Conducting extensive financial
screening using our state-of-the-art computer databases;
- Gaining referrals from
contacts, including CEO's and financial professionals across a
number of industries;
- Constant tracking of a large
number of companies that the principals have followed for a
number of years. Occasionally certain stocks will decrease in
value significantly below their private market value based on
sentiment or short-term issues.
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