Broad Considerations
Benjamin Graham advised only purchasing securities that were trading for 66 cents on the dollar on a liquidation basis. He was able to construct portfolios of up to 100 issues that met this criteria. Today it is harder to find the volume of cheap stocks that Graham could. This might be evidence of the market becoming more efficient over time. However, opportunities still present themselves in the smaller companies and the list is definitely worth rechecking whenever we experience a financial panic.
Earnings
Many of the companies highlighted on the liquidation list have negative EPS. Although shareholders could make a tidy profit if management simply shut the firm down and sold off the assets, this would involve management firing themselves. Companies on the liquidation list with negative EPS should be viewed with much more caution than positive EPS stocks. However they are still worth considering especially if activist shareholders get involved.
Size
Everything else held constant, larger companies are preferred for the liquidation investor. Firms trading below liquidation value can represent a market inefficiency. Since larger firms have more eyeballs watching them, if you can buy them below their liquidation value than you will have less time to wait before a sane valuation returns. Also, the larger firms are more likely to attract hedge fund activists who can help you push management towards doing what is in the best interest of shareholders.
Qualitative Factors
The liquidation list I publish is the first step in a long process. The list is only meant to take care of the heavy lifting. Understanding the business, reading the 10-K, and a longitudinal analysis of the 10-Qs (does management say one thing and do another?) are the next step. The biggest qualitative factor to focus on is management's perception of the shareholder. If management's interests become aligned with shareholders, the firms won't be on the list for long. You really need to understand the principal-agent problem and to what extent it is affecting the shareholder.
Dividends
Special dividends are a common way of the company rewarding the liquidation investor. For example, if a company is trading for below net cash, the company could simply pay a huge dividend that was over 100% of the share price. Also please note that when calculating the liquidation ratio my program simply looks at the last quarters balance sheet. If any dividends have been paid after the date of the last balance sheet, my ratio overstates the amount of cash the firms actually have. You can look at the charts on Google Finance to see if any huge dividends were paid.
Prudence
Nothing about this strategy can be thought of as "risk free." Smart liquidation investors diversify across many liquidation opportunities when they are available, and they accept when no attractive opportunities are available. Despite the compelling valuation of some securities, I think that index funds and asset allocation should remain the core of any long term investment plan.