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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Kid Rock who wrote (42938)	11/20/2008 9:12:43 PM
From: energyplay	2 Recommendations Read Replies (1) \| Respond to of 218043

There are at least three answers to this question, you see which one fits best. When the market cap is below sales, or book value, that usually means the market expects massive trouble in the near future - sharp sales decline, losses, lawsuits, derivaties blow ups, a commodity hedging strategy gone wrong or profitable hedges expiring. In the case of the coal companies like BTU, coal is carbon, and carbon is expected to be under cap and trade restrictions becuase of CO2 greenhouse gas issues. So future sales volume be much lower, and the price is likely to be much lower. So valuing the stocks depends on what you expect the future events and prices to be. expect the future events and prices to be. >>>That's the rational side. *Many times the uncertainty factor will produce a large price discount, even from almost worse case analysis. With stocks that have been investors favorites for some reason, some times there will be a premium remaining over best case. Both people and instituions can hae emotional attachments to stocks that have done well for them, like they owe the stock a personal favor. Examples would be Dell, Qcom, Apple. During the Clinton adminstration, there was enormous fear that prescription drugs would be price controlled by Hillary's health care proposals. This caused a presistent 20-40% discount in the prices of drug stocks vs. comprable large stocks. This discount went on for years. A similar abnormal level of fear may apply to coal stocks under Obama. >That's the behavioural finance view. Sometimes the stock price is just wrong for no good reason at all. This tend to be true with smaller stocks - look at the stocks on Bosco & Crossy's thread for some really obscure stocks. Ed Adjootian on the Boom Boom Room also finds obscure stocks, or maybe your reflexologist tells you about them. No analyst coverage, or only one analyst is often a reason. Somethimes they are on an exchange that is harder to trade, like Australia or Norway. There's often about a 5-10% discount just for smaller stocks which are only on Canadian exchanges. Sometimes the sector is ignored like Uranium stocks were for years and years. Sometimes the stock symbol is just near the back of the alphabet. >Note that being obscure doesn't mean the stock is a good investment. Just like some rock bands are really obscure because they play badly. All the above contradicts the efficent market thesis. The efficent market works well for popular stocks that are followed by multiple analysts, are on multiple, large exchanges, etc. So there are the three types of answers - Rational reasons, irrational emotions, and it beats the heck out of me, I've never heard of the company.