This Stock Is Completely Worthless

Motors Liquidation Company (MTLQQ.PK) is the zombie stock representing what has been discarded by the old General Motors. As its name implies, the liquidation company is being shepherded through bankruptcy liquidation, and its shares are completely worthless. To be clear: Its fair value is $0.00, not a penny more.

Don't just take my word for it
Here's what the company itself claims: "Management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios."

And the U.S. Securities and Exchange Commission agrees: "Motors Liquidation Company is currently winding its way through bankruptcy court -- and there is a real possibility that stock holders will receive nothing from these proceedings. While the common stock of Motors Liquidation has not been cancelled, investors should not interpret that as indicating that the shares have any value."

It doesn't get any more obvious than that
Both the company and the government acknowledge that the stock is worthless. In spite of that, the recent price of $0.40 apiece for its shares gives the company a nearly $200 million market cap. That's insane. There is no rational or logical basis behind that kind of valuation.

Yet it's there. And with millions of shares trading in any given day, that irrational pricing persists, despite volumes heavy enough that the shares clearly aren't suffering from a lack of liquidity.

There's only one conclusion that you can rationally draw from what's happening with Motors Liquidation's stock: The market is nuts.

What efficient market?
If nothing else, what's happening with Motors Liquidation should drive a stake through the heart of whatever's left of the Efficient Market Hypothesis. There is absolutely no way that the company's fair value is anywhere near where it's trading in the market. Yet if the market were efficient, the market price would have to be linked with the company's intrinsic value.

But hey, what's $200 million between friends? Rounding error, right?

So what?
While what's happening with Motors Liquidation is an extreme example, the market is often driven to wild swings and emotional excesses, on both the upside and the downside. Just take a gander at the moves among these fairly large and well-known (and followed) stocks over the past 52 weeks:

Company

52-Week High

52-Week Low

Low-to-High Swing

salesforce.com (NYSE: CRM  )

$104.44

$43.38

141%

Tata Motors (NYSE: TTM  )

$21.80

$10.50

108%

Williams Partners (NYSE: WPZ  )

$48.95

$18.50

165%

CenturyLink (NYSE: CTL  )

$37.15

$14.16

162%

SanDisk (Nasdaq: SNDK  )

$50.55

$16.22

212%

Cliffs Natural Resources (NYSE: CLF  )

$76.17

$23.67

222%

Akamai Technologies (Nasdaq: AKAM  )

$46.72

$16.76

179%

Source: Yahoo! Finance.

Every last one of them has either doubled off its low or been cut in half from its high, in the space of a year. If the stock market were truly an efficient arbiter of companies' fair values, such swings would be rare enough to be virtually nonexistent. The table above indicates that each of these companies has -- at some point -- been very inefficiently priced over the past year.

Yet whether it's in the form of a $175 million market cap on a worthless liquidation company, or the whiplash-inducing swings on other highly followed stocks, the market regularly gets it wrong, time and time again. Luckily for you, this means you don't have to be perfect to beat the market. You just have to recognize when the market is completely off its rocker, and invest accordingly.

What you can do about it
Whatever the market may think of its stock at any given time, a company's intrinsic value tends to adjust slowly as the business evolves over time. If you focus your effort on determining that intrinsic value, you can begin to identify those times when the market gets it clearly wrong. When the market prices a stock well below its intrinsic value, it's time to buy. When it prices the stock well above its intrinsic value, it's time to sell.

You don't need to be perfect in your analysis, or have access to lightning-fast trade executions, to beat the market. Quite often, you just need to recognize when the market is outrageously wrong, and make your investing decisions accordingly. And yes -- sometimes, that means selling first and buying back later, also known as shorting. After all, when the market gets it wrong, it can price a stock too high as well as too low.

Shorting isn't for everyone, of course, as your upside is limited (no stock can drop below $0, after all), and you can wind up losing more than you invested. But given the number of overvalued companies and earnings manipulators out there, it can be a lucrative strategy if you do it right.

If you're looking to short individual stocks for big gains (or even identify potential time bombs in your portfolio), enter your email in the box below. We'll send you our latest research the instant it's published -- plus, we'll also send you a brand-new, absolutely free report, "5 Red Flags -- How to Find the BIG Short," prepared for you by our resident forensic accountant, John Del Vecchio, CFA. Simply enter your email in the box below now.

This article was originally published Oct. 1, 2009, as "This Stock Is Absolutely Worthless." It has been updated.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta did not own shares of any company mentioned in this article. Akamai Technologies and salesforce.com are Motley Fool Rule Breakers selections. The Fool has a fairly efficient disclosure policy, with an intrinsic value significantly higher than its market price.


Read/Post Comments (17) | Recommend This Article (54)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 12, 2010, at 3:37 PM, eaglessoar wrote:

    So why not short it?

  • Report this Comment On August 12, 2010, at 4:30 PM, JPDemers wrote:

    In this oh-so-efficient market, surely there's a way to short MTLQQ? I'd be happy to help rationalize the price!

  • Report this Comment On August 12, 2010, at 4:44 PM, biv007 wrote:

    Is it possible some of these ETFs that drive the market up down & sideways have included MTLQQ, just a thought.

  • Report this Comment On August 12, 2010, at 4:45 PM, DaveGruska wrote:

    I saw an article somewhere incorrectly inferring that MTLQQ was the stock ticker for the new GM IPO. Maybe that had something to do with it, but still - about 2 seconds of research would have set you straight...

  • Report this Comment On August 12, 2010, at 5:17 PM, ByrneShill wrote:

    The efficient market hypothesis also stipulates that price discovery is only possible if the market can move to both side of current price (in other words, you need to be able to go either long or short). Since you can't short pink sheets stock, the market can't be efficient in this case.

    Note that there's no way to profit from that inefficiency. If one could short the stock, I would personnaly short it all the way to zero, making the market efficient.

  • Report this Comment On August 12, 2010, at 5:43 PM, mythshakr wrote:

    And, of course, if you want to know just how ineffective the Government regulators are, the fact that they continue to allow trading of an equity which both they and the issuer agree has zero equity value speaks volumes.

    As noted above it is likely that many of the shares traded are held by ETFs and mutual funds that don't want to write them off.

    But still...

  • Report this Comment On August 12, 2010, at 5:47 PM, timeinthewind wrote:

    The same thing happened with Wordlcom stock back when they were in bankruptcy. People bought and sold yet in the end the stock was cancelled and the shareholders were left with nothing.

    Another cause for this may be penny stock traders that aren't looking closely enough at what they are buying and selling.

    And there are some people that will simply gamble on stocks that are trading for pennies. Dropping a few hundred dollars to grab thousands of shares of what was once a $40 stock is like buying a lottery ticket. Chances are you will never see your money again but there's a one in a few hundred million chance that things go differently than expected and you win big. I don't recommend this but I am sure it happens.

  • Report this Comment On August 13, 2010, at 10:21 AM, BMFPitt wrote:

    I keep the Yahoo quote for this bookmarked just so I can remind myself how stupid people are.

    The volume amazes me every time I look at it.

  • Report this Comment On August 13, 2010, at 10:37 AM, CustardPies wrote:

    Dear Fool,

    We heard you the first time...

    http://www.fool.com/investing/value/2009/10/01/this-stock-is...

    And we listened for a second time, just to humor you...

    http://www.fool.com/investing/value/2009/11/06/this-stock-is...

    Then the third time rolled around, and we rolled our eyes thinking, alright I'll let it slide...

    http://www.fool.com/investing/value/2010/04/14/this-stock-is...

    When that fourth article popped up, we started questioning our sanity...

    http://www.fool.com/investing/value/2010/05/12/this-stock-is...

    Surely there can't be a fifth article about the worthlessness of MTLQQ.PK, right?!?! Wrong...

    http://www.fool.com/investing/general/2009/07/10/gm-this-sto...

    But the critical question becomes... why write five articles about the same thing when you can write six?

    Now excuse me while I go buy some GM liquidation stock. I'm bullish.

  • Report this Comment On August 13, 2010, at 12:56 PM, ChrisFs wrote:

    "And, of course, if you want to know just how ineffective the Government regulators are, the fact that they continue to allow trading of an equity which both they and the issuer agree has zero equity value speaks volumes."

    Sounds like you are setting up a no-win for the Govt. If they let it run, they are ineffective and if they stop it, then they are being 'socialist' and 'interfering with the free market'.

    As far as I know, the SEC doesn't dictate which stocks should be trade and which shouldn't be, that's the exchange's job and they are private companies (you can buy shares in the NYSE).

    Furthermore, look at the pink sheets sometime, you will find quite a few companies whose worth is well below their stock price.

  • Report this Comment On August 13, 2010, at 2:23 PM, mpendragon wrote:

    One of the reasons Zombie GM is trading as high as it is has to do with how hard it is to short the stock. Here's an article by the <a href="http://www.nytimes.com/2009/10/31/business/31charts.html?_r=... on this problem.

  • Report this Comment On August 13, 2010, at 2:49 PM, mpendragon wrote:

    Sorry about that goofy link. I thought it needed the HTML to make the hyperlink work but it will still get you to the article.

  • Report this Comment On August 13, 2010, at 3:22 PM, neutrinoman wrote:

    I'm not a fan of the EMH, at least in its simplest and most naive form. But I think this article runs roughshod over some important facts about the "old GM."

    Like the furious trading last winter of Fannie, Freddie, and Lehman (pink sheets), there's a speculative uncertainty about the bankruptcy of the old GM, and the possibility of further bailouts. What's going on here is large political uncertainty. When you have clear rules, and clear criteria for success and failure, markets can be efficient. When all that is murky, markets cannot be efficient, at least in an absolute sense, only efficient relative to the uncertainties.

    Financial and other asset markets, unlike the markets for goods and services, don't have to be rational, because they're inherently speculative. The law of supply and demand operates only over years or decades, or even generations. When you add legal and political intervention, it's not even clear what "efficient" means.

  • Report this Comment On August 13, 2010, at 9:12 PM, pinestholdings wrote:

    Why is your "forensic accountant" a CFA and not a CPA?

  • Report this Comment On August 14, 2010, at 2:42 AM, jdshaver wrote:

    Unfortunately, the case with the value of MTLQQ.PK/GM is less a story of dollars and cents than it is of those who believe our socialist trending government will continue in its socialism of big businesses. This is just another example, like that of Fannie and Fredie, when a former powerhouse with a household name becomes a good takeover target for the US Government, it will keep it afloat for its own selfish reasons, despite the fact that capitalism dictates that the market has a bottom and the company should have failed.

    When the government does this (By pumping exorbitant amounts of our tax dollars into the company), they are playing the stock market with our tax dollars, artificially inflating the value of such companies, and creating a market without rules, or in these cases, a bottom.

    These buyouts of course come with huge incentives to the central government, making the goverment dependent on the company’s future success for repayment, and thus biases towards its future success. This is just another example of how our central government is, in an underhanded way, nationalizing formerly public businesses in its move towards socialism.

    Sure, technically these companies are still publicly owned following their bailouts, but they are then highly indebted to the national government, have nothing (of their own) to lose, and have tasted the government dole.

  • Report this Comment On August 14, 2010, at 8:18 AM, manfrog11 wrote:

    so Motley fool is pushing the use of shorts. Instead of watching all our investments go to ZERO............ We should all get together and go to the casino, that is what the market has become. So might as well have some fun. while a few end up with all the money.

  • Report this Comment On August 15, 2010, at 3:03 AM, mullaroundman wrote:

    Thank you fellow fools. Since reading all of your comments, I am more efficient at figuring out what to do. (I almost called my broker to commence a substantial short on this liquidation-stock-thing. But then why does yahoo show a $44 per share book value.) Then I learned from reading JPDemers' and Byrneshill's comments that you cannot short pinksheets . Special thanks to CustardPies for keeping score for this newcomer (foolish me) to see. Interesting discussion about efficient price determination from neutrinoman and taking the cake seems to be jdshaver. I think ChrisFs might agree. Anyway, wish me luck: I might be the biggest fool of all: I am going to click on the box to get a list of potential shorts.

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