Use This Filing to Trade Like Jeff Berkowitz
There are pros and cons to a great balance sheet: The "pro" is obvious. If a company has $1 billion in cash, makes money every quarter and has no debt, then it's going to be difficult for it to go bankrupt. That seems like an extreme worry, but who would've thought in early 2001 that Enron, Adelphia, and WorldCom would be bankrupt less than 18 months later? As Buffett says, "If you know a stock is going to be around 20 years from now, then it's probably a good buy right now."
The "con" is less obvious. Great balance sheets do not leave much room for improvement. That's why you go into heavy debt when you buy a house. If your "cash flows" (i.e., your income) are steady and continue to rise, and your "coverage" (your monthly income divided by mortgage payment), remains doable, then ultimately your net worth ("market cap" in the stock sense) goes up a lot more than if you used no leverage and paid for your house with 100% cash.
It's the same thing with stocks. You want that boost in market cap that a leveraged asset can provide if the debt is handled appropriately. But that potential for upside returns implies more risk, hence the "pro" from above. Nevertheless, Berkowitz's portfolio appears more slanted toward companies with the aforementioned great balance sheets.
A great example of where this has helped him is in his holding of stocks such as iVillage (IVIL). These were stocks that only recently have started posting profitable quarters, but were able to hang on through "the dark years" only because of good net cash positions ($55 million for IVIL).Low Multiple Over Cash Flows: Although Berkowitz owns calls on stocks such as Google (GOOG) and Apple (AAPL), most of his picks fall into the value or deep-value category. Two points on Google and Apple, though. First, by owning them through calls, he's capping his downside somewhat just in case volatility kicks back into the market and these stocks are no longer the fashion of the day. Second, ultimately there's no separation between growth and value. A bet on Google is simply a bet that future cash flows, when everyone sees what they are, will imply that today's prices for Google are in deep-value territory.
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