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Why should a stock be cheaper than its NAV?

A share (not ETF, just a normal share) that I own has a NAV of 163 - but is traded at 142

Shouldn't the trade price be higher than the NAV? What stops me from buying ALL the stocks and sell all of its inventory(which would give me about 15% profit)?

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    How did you calculate the NAV? If you're looking at the balance sheet note that the accounting value of assets (and debts) and the market value can be vastly different. But hypothetically, yes, one can arbitrage by buying up all of the shares and selling off the assets (it's called a Liquidation Arbitrage) – D Stanley Jan 17 '18 at 15:17
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There are two questions here.

  1. Why would book value exceed market value?
  2. Why can't I just buy all the shares at 142 and liquidate book value to make profit.

Answering the second question.

tl:dr Would cost more than current market value. Company may fight you. Liquidation value may be less than current book value.

  1. Your bank account is not big enough. (Just guessing.)
  2. Of all the people holding shares, some of them are willing to sell at 142 as seen in the market price. But the market price is not the price at which all of the holders of the security are willing to part with theirs. So you do not know who much it would cost you to purchase all the shares.
  3. Once you own a certain percentage of the company you have to publicly disclose so alerting others to your plans.
  4. The company may have anti-takeover provisions such as a staggered board or poison pills.
    1. A staggered board is one with multi year terms and only a portion elected each year. Say three year term with a third elected each year. Once you owned all the stock, at the next board meeting you could elect one third of the directors, and still not have control of the company without the help of some of the existing directors. It would be another full year before you'd be able to elect a majority of the board.
    2. Not sure how poison pills work. I think they do things like allow the board to issue massive amounts of new shares and giving them to all the other stock holders, diluting your position. (Doesn't sound legal, so don't quote me on that.
  5. To avoid the anti-takeover provisions one does a friendly takeover where one offers a premium to market price.
  6. Book value is different than liquidation value. Say this is a manufacturing company. They probably have custom tooling that is on the books, but would have no value to anyone else, thus a liquidation value of scrap metal.
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    Lots of good points here, but the quality of the answer would be improved by answering your hypothetical question #1, which is more of what the OP is actually asking about. Part of what you provide for 'answering q#2' already hints at 'answering q#1', but should be more directed so that a less knowledgeable reader could easily pick up on it. – Grade 'Eh' Bacon Jan 17 '18 at 16:15
  • A toaster may be worth $50. But a billion toasters is not worth $50 billion. The NAV just multiplies the price you can sell one for times the number you have. For many assets, that severely overvalues. – David Schwartz Jan 17 '18 at 19:20
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  • The stock is slightly undervalued OR the NAV is slightly overvalued, or both.
  • Buying all the stock and selling the assets is called a hostile takeover. As you buy the shares available, the price will go up. To buy enough shares to achieve control, the total cost would probably push the share price over the NAV.
  • Corporate raiders specialize in takeover, reorganization, liquidation of assets, selling off the leftover company, if any.
  • At only 15% difference, there's probably not enough meat there to make a profit.
  • What you can do is find companies that are undervalued, and use that as one indicator that you might be interested in buying. Keep in mind that one reason for the share price to be undervalued is that the company is stagnant, declining, or in the process of failing. However, if you find one that is growing, and maybe has a bit of confidence problem, you can pick up those shares on the cheap. This is highly speculative, and high risk.
  • While this is a good answer I'm still confused. All the company does is holding other shares - thus the NAV is more or less precise. Are there more points I don't get? – Swizzler Jan 19 '18 at 20:00

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