Monday, December 5, 2011

How Low Can Bidz Go?

Just three months ago, was discussed on this site as a potential value investment, due to its 50% discount to its net assets. Since then, the stock has almost halved, giving the company about a 70% discount to its net current assets. Note that the company has no debt!

Such a discount for an American company with no debt is astounding! (For a US-listed Chinese small-cap with tons of "cash", however, this discount could seem rather low!) What makes this situation even more incredible is that management owns some 40% of the company, so you would think that it would take steps to stop the bleeding.

You would be wrong. Cash continues to be spent trying to grow the business. Inventories are up while sales are down, and clearly the market has absolutely no confidence that management's attempts will work.

At such a large discount to net current assets, however, some incredible returns may be made here. Surely at some price this thing becomes attractive, despite the company's shortcomings. What price is that for you?

Disclosure: No position


Anonymous said...

You made a supposition that at some price it is worth buying.Really how do know that?Some things are worthless at any price.

Ankit Gupta said...

2 issues at hand here:

1) We don't know the extent to which the inventories can actually be sold off and at what price

2) With these situations, the price may justify it, but it might still not be a sound investment. I think the volume of purchases you make can impact the final outcome and value. Reflexivity might make an impact here. If you can buy the entire company at a large discount, then sure, you could liquidate it and make a profit. In reality, the odds of management agreeing to a buyout are slim to none.

I think the value of buying 1,000 shares can be very different than buying 100% of the company. The investor can often make a direct impact in the value delivered to the shareholder - we aren't always buying the same result, because each asset is worth a different price to each investor for numerous reasons. You can buy something at one price and be 100% right while I can buy it at twice the price and be 100% right as well.