Company Factors
The next primary factor of why certain companies or stocks sell at a significant discount to their intrinsic value have to do with the internal company causes. There could be a number of different issues here, but some of the primary ones include.
- Management Change or Internal Infighting
- Financial Failure, Financial Mismanagement or Fraud
- Competition Is Eating Their Lunch
- Product Failure or Market Failure
- Falling Growth Rates, Deteriorating Financials and No Clear Future/Catalyst
- New Technologies Are Entering The Market
Once again, there are many others, but these are the primary issues. Any given corporation can have one or multiple factors working against it at the same time. Whatever the situation is, it can greatly impact the value of any given stock. If investors are aware of any such negative developments there is a good chance the stock will be sold off. So much so that you are likely to find it selling at a significant discount to its intrinsic value.
Let me give you an example. I believe it was in 2003 when I was invested in a fast food concept out of San Diego called Pat & Oscars. It was a very well run company at the time, selling at a very reasonable valuation (that was well below its intrinsic value) and the company was planning to grow its chain nationwide. So, value and growth all in one. Yet, at some point in 2003 the company had an E. Coli outbreak in its San Diego restaurants, poisoning a bunch of people in the process. The stock sold off the next day to the tune of 50%, giving investors a chance to buy a good company at a huge discount (assuming this E.Coli outbreak doesn’t kill the company).
This is what you would call a company factor. It is company specific and depending on a situation it can provide investors with amazing buying opportunities. The trick here is to figure out if the issues is a permanent one or a temporary one as in the example above. If it is a temporary one and if your research is proven to be correct a significant amount of money could be made while taking very little risk.
Industry Factors
Finally, various industry factors can push any stock into a significantly undervalued category. It could be because of cyclicality, it could be due to industry wide technological change, it could be due to pricing pressure and so forth. The trick here is to find the best performing company in the sector and make sure you buy it at a significant discount. When the industry eventually recovers, the best performing companies should outperform the rest of the sector by appreciating the most.
For example, let’s assume that your research indicates that the price of gold should go through the roof over the next 5 years. Yet, for some reason gold mining stocks are selling at an all time lows due to the price of gold being low today. In fact, most of them selling well below their liquation value. What you should do if you really believe in your investment thesis is identify 1 or 2 best companies in the sector and invest in them. If your research proves to be right, your stand to gain a substantial amount of money while keeping your risk at a minimum.
In summary, while the are many other …. market, company and industry factors are the three primary forces responsible for driving stocks well below their intrinsic value. When doing fundamental research you should clearly know which one of these forces is responsible for pushing the stock in question into the 50-90% discount category. Clearly understanding that could mean the difference between making a great investment and making a disastrous one.
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