1/ Investors Beware of Fools Gold. Similar to Veiled Value stocks, which I discussed in a recent paper, Fools Gold is another group that is causing confusion for investors.
2/ Value Traps come in many forms, but Fool’s Gold are in the cheapest 1/3rd by Price-to-Book but the most expensive 1/3rd by other metrics like Sales, Earnings and Cash Flow. In other words they look cheap only by Price-to-Book standards.
3/ Fools Gold companies have overstated and distorted book value of equity. These are very expensive stocks masquerading as value and they deceive the investor relying too heavily on Price-to-Book. As a group Fools Gold stocks have had abysmal returns. 
4/ The number of names in Fool’s Gold is growing …
5/ …and most are included in the value benchmark by Russell’s definition.
6/ The big “So What?” for investors is that a passive investment in value will own most of these names with historically have terrible returns.
7/ Stocks can get into the Fool’s Gold group for an assortment of reasons but either an asset is overvalued or a liability is undervalued. We will help illustrate how book value can be overvalued vs reality with a couple practical examples
AOL Time Warner & HESS
AOL Time Warner & HESS
8/ AOL and Time Warner Merger. Referred to by many as the “Worst merger of all time.” When the combined entity reported for the first time it added an extraordinary $127 Billion in goodwill to the balance sheet.
9/ AOL:That goodwill asset single handedly moved AOL Time Warner from the most expensive 5% of the market by Price-to-Book to the cheapest 20% of the market, moving it into Fool’s Gold territory overnight because it was still in the most expensive third by other measures of value
10/ AOL (cont) When AOL Time Warner wrote off $50 Billion of that Goodwill just 2 years later their book value was still so inflated that even after reducing assets by $50 Billion they still looked cheap by Price-to-Book.
11/ HESS highlights lags in asset impairment. In 10 HESS expanded rapidly and tripled their assets. Unfortunately for HESS, these asset values were heavily dependent on the price of oil which from 2014 to 2016 dropped from over $100 a barrel to under $30 a barrel.
12/ HESS (cont) That drop made the assets HESS acquired during years of higher oil prices much less valuable. That reduction in value quickly translated to deteriorating profits and cashflows but assets were impaired much slower. Making HESS a member of Fool’s Gold.
13/ Add all the ways that Fools Gold companies exist to the reasons why investors need to use caution relying too heavily on book value as an investment metric. If your process so much as tilts towards value it is important to understand how value is defined.
