A few months ago, we looked at UTS Energy (UTS). Though it appeared to be trading at a bargain relative to its balance sheet items, it represents a great lesson to investors of why a cursory look at a company is not an adequate basis with which to make an investment. More recently, events at this company have highlighted two market properties which are of particular interest to value investors. We'll explore the first one in this post, namely:
1) The short-term point of view with which market participants often take
To illustrate this point, it is necessary to consider UTS stock's recent trading history. The share price mostly traded between 80 and 90 cents per share in the four months leading up to the end of January 2009. At the end of January, an offer was made at $1.30 per share. The market reacted, however, by bidding up the shares to $1.75, presumably in the belief that the assets of this company warrant a take-out price higher than what is offered in this initial bid.
But only after this catalyst (the initial offer) did the market move UTS' share price to what it believes to be a fair price for control of this company. And this new share price represents a 100% premium to the original price. In other words, those who understood the market value of the assets could have bought in before the first offer was made, but they did not.
When value investors see a disparity between what a company is worth and what it trades at, they need not necessarily wait for a catalyst event. With a diversified portfolio of stocks that trade at substantial discounts to what they are worth, the investor is putting himself in a position to capitalize with the largest magnitude of returns if and when the company's assets do become recognized. Indeed, the investor who thought the value to be $1.75 when the stock traded at 80 cents has seen a gain of over 100%, while those who waited for the catalyst saw minimal gains as the stock price reacted almost instantly the day of the bid.
While the tenet that the market is very short-term in its thinking can be applied to find value in many a stock, that is not necessarily the case for UTS, as we'll see when we discuss the second market property which is evident with respect to this company's recent events.