Thursday, April 29, 2010

For What It's Worth

Just over a month ago, we saw that real-estate development company Genesis Land (GDC) hired a 3rd party appraiser to value its land holdings. The signal from management was clear that it believed the market was severely undervaluing its properties. The appraisal results did not disappoint; the company's stock price rose 25% on the day the appraisal results came out.

While the company trades for around $5/share, the appraiser puts the company's net asset value at $8.25/share, after taxes. As such, an opportunity may still exist for shareholders looking to buy real-estate at a discount. It should be noted, however, that while the appraiser is called "independent", common sense dictates that this is not the case. The appraiser was paid by the company, and will want the company's future business, and will therefore come out with results that are favourable. (Similarly, a director who consults for a company cannot be considered independent, because he is likely to agree with the CEO to keep the company's business coming his way.)

Nevertheless, this situation appears to illustrate that stock values do deviate wildly from net asset values. We saw this last year when we looked at the example of Melcor, not once but twice. For the enterprising investor who takes the time and effort to appraise company properties, there are likely huge gains to be made, as the market is clearly not efficient.

Disclosure: None

10 comments:

Ankit Gupta said...

Right - if a company wants to increase the stock price by showing a good valuation, they will simply "shop around" till they find what they're looking for. They have no short term incentive to go with a correct valuation that says their stock price might be over/correctly valued.

Anonymous said...

any thoughts on GDC now that we know the transaction didn't go through?

Saj Karsan said...

Hi Anon,

Obviously the CEO is still trying to sell, and the assets appear valuable. I think the main risk to the land values is an oil price collapse which would depress prices in that province.

Anonymous said...

Saj,

What do you think about the CEO resigning? A lot of uncertainty around this one without any reasons given for the deal to not go through, CEO's resignation, etc...

Are you still interested in this?

Saj Karsan said...

Hi Anon,

I have no idea what to think. This doesn't make sense to me seeing as how the former CEO is such a major shareholder. Nevertheless, the company stated it continues to focus on strategic alternatives, so you would think the major shareholder would have to play a role.

Saj Karsan said...

Well at least now it makes sense as to why he resigned. Hopefully the company can get a deal done and get everybody out who wants out.

Anonymous said...

Hi Saj
any thoughts on the recent insider buys?

JEJE

Saj Karsan said...

Hi JEJE,

Not really, I wasn't even aware of them. Calgary's RE market is hot, though, which hopefully helps this company continue to move its inventory.

Anonymous said...

Hi Saj,

Proxy battle going on at Genesis right now. Do you see any value coming out of it?

thanks

Saj Karsan said...

Hi Anon,

I sure hope so! No idea what will happen though.

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