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I was wondering, if there is such a stock, why isn't everyone getting it as there is supposedly no risk.

For instance, a stock like NYSEARCA:VDE has

  • Price to Book: 0.78.
  • Div yield: 1.99.
  • Growing net income for the last 5 years.
  • P/E: 4.05.

I would think this is a really good deal. But if so, the stock would be noticed and bought by many so the price would go up.
Why isn't it so? Why and how would it be a bad purchase? What are the other factors that define its value as an investment?

※ I am not thinking about buying this one in particular. I am learning stuff and would like to know more in this kind of situation.

  • 1
    The link goes to Vanguard Energy ETF, a mutual fund. Is that the same as what you posted? The energy sector has a lot of MLP (master limited partnerships) with productive but depreciated assets, so it's perhaps not unreasonable that the depreciation is on the books? – user662852 Jun 12 '15 at 3:17
  • @user662852 Yes it is. Why would something productive be depreciated? – oldergod Jun 12 '15 at 4:34
  • My original comment was late night and not material. However I will add a mor direct answer – user662852 Jun 12 '15 at 12:19
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The VDE fund is an energy fund so this is a function of recent price changes in oil (and gas, coal, &c).

For example.

Lets say last year when oil was $100 per barrel a bunch of companies saw a good return and put $ 100 million into a bunch of leases, boreholes, pumps, &c to return $10 million per year, and the market says yeah, they're all together worth 100M.

Now oil is less, maybe $40 per the link. These exploration companies don't have a lot of labor or variable costs; they are operationally profitable, may have "use it or lose it" leases or minimum pumping requirements for contract or engineering reasons. Lets say the cash flow is 7M so the market values them at 70M. They still have about 100M book value so here we are at .7 and I believe the scenario in the question.

Nobody would invest in new capacity at this oil price. The well equipment could be repurposed but not the borehole or lease, so the best use is to continue pumping and value it on cash flow. If an individual well runs negative long enough and goes bust, either a different pumper will pay the minimum price that gives profitable cash flow, or that borehole that cost millions to dig is shut off and rendered valueless. The CNBC article says some explorers are playing games with debt to maintain yield, so there is that too.

In the ETF, your bet is that the market is wrong and oil will go up, increasing future cash flows (or you like the current yield, taking on the risk that some of these oil explorers could go bust).

  • The NAV is probably lower than the book value indicates. The price is updated every day, but I bet NAV is based on the last time Vanguard issued their report. – Angelo Aug 4 '15 at 7:19
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A lower Price/Book Value means company is undervalued. It could also mean something horribly wrong.

While it may look like a good deal, remember;

  • Book Value is a point in time snapshot. It can very quickly loose value.
  • Company may be loosing money faster and this can deplete the Assets very fast. In fact at times its so rapid that, virtually becomes scrap.
  • One also need to realize the quality of assets.
  • The Book Value is a theoretical value and may not represent the true Liquidation Value. i.e. if you are think one would still make money if the company sold everything and distributed back the cash to shareholder, it may not be. Liquidation events cause a stress and Assets get devalued as there is a perceived risk in acquiring these assets.
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Note that the formula for Price to Book ratio is:
Stock Price / {[Total Assets - (Intangible Assets + Liabilities)] / Stock Outstanding}
http://www.investopedia.com/terms/p/price-to-bookratio.asp
http://www.investopedia.com/articles/fundamental/03/112603.asp
There's a number of factors that could lead to a lower than 1. The primary reason, imho, could be the company is in a state of retiring stock with debt. The company is selling penny stocks (only to get people more interested in it's later development) which are inherently undervalued. There may be other reasons, but definitely check out both articles.

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Book value = sell all assets and liquidate company . Then it's the value of company on book.

Price = the value at which it's share gets bought or sold between investors.

If price to book value is less than one, it shows that an 100$ book value company is being traded at 99$ or below. At cheaper than actually theoretical price.

Now say a company has a production plant . Situated at the most costliest real estate . Yet the company's valuation is based upon what it produces, how much orders it has etc while real estate value upon which plant is built stays in book while real investors don't take that into account (to an extend).

A construction company might own a huge real estate inventory. However it might not be having enough cash flow to sustain monthly expense. In this scenario , for survival,i the company might have to sell its real estate at discount. And market investors are fox who could smell trouble and bring price way below the book value

Hope it helps

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