April 17, 2006
One of the stocks I follow regularly [VSM.to] has been on a real downward run lately [luckily I don't currently own any].
When you don't own a stock, watching is float downward is quite enjoyable, especially if you believe the company does have some intrinsic value. The question becomes when to buy?
One of the facts to consider when a stock has been in a deep dive like VSM is book value. Simply put book value is the company's assets – liabilities. So if you sold everything that the company owned [land, buildings, equipment etc.] and paid off all of their debts, the book value is everything that is leftover.
If we take that amount and divide it by the number of shares in circulation [shares outstanding], we arrive at the book value per share. When the price of a stock approaches this value it is difficult for it to go much lower. To an invester the book value often represents the safest possible entry point for a stock.
There are some other things to be aware of.
- How current are your figures? Usually you will be using figures from company's last published financials. You may want to contact their investor relations department to make sure things haven't changed since the last report.
- If a company is loosing money regularly, which is about normal for a company who's stock is on a massive downturn, then every day they are in business their cash [asset] is going down or their debt [liabilities], or number of shares [float] is going up.
- And the third consideration is what is included in the company's assets? Some assets are valuated on the books at a higher amount than they would be sold for at a liquidation auction [which would be more accurate for what we are dealing with for this type of investment].
- If the company does go bankrupt, it is important to know that as a common shareholder you are the last in line when it comes to receiving payment. Debt holders [usually bondholders or banks] and preferred shareholders, and probably the lawyers, will all be paid before you.
In theory, a company trading close to book value is the safest type of investment and many investors have adopted this strategy as their preferred method [value investing]. As always though, thorough due diligence is required to minimize risk further.