Sunday, September 28, 2008

Land Ho!

In 2006, Forbes published an article titled "Land Ho!" where they discussed five stocks (HZO, ATML, BJ, STAR, PBY) which own land values far in excess of their carrying values. In other words, these companies' balance sheets understated the true value of the real-estate owned by these companies.

Three of the five stocks, however, are down big. MarineMax (HZO) is not in a favoured industry right now and has lost 65% of its value since that article. Atmel (ATML) has lost over 20% of its value, and Pep Boys (PBY) has been clobbered by around 35% since the time of writing.

So what gives? Wouldn't you expect these stocks to do better over time than the rest of the market? Not necessarily. It is faulty to assume that the market has no idea about the market value of a company's real estate holdings. If a journalist can figure it out, so can investors. These are not exactly obscure stocks, which is where we tend to find the most inefficient pricings, as discussed here.

Even if the market did not recognize the hidden value of these real-estate holdings, there are many factors that go into a company's valuation. One cannot simply look at one component of a company and determine that it is undervalued. For example, in the case of ATML, it had a price to book value of 2.4. After adjusting for the value of the real estate, it still had an adjusted book value of 2.2, which at first glance doesn't exactly scream value.

The bottom-line is, there are no short-cuts to investment success from reading about large-cap companies from mainstream media outlets. For sustainable investment success, each investment you make in the stock market must undergo the same scrutiny as if it were a private investment of yours. You wouldn't unequivocally purchase a house or car on account of a journalist's report, neither should you a stock investment.

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