This Stock Is Absolutely 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. But even so, the recent price of $0.20 apiece for its shares gives the company around a $120 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 $120 million between friends? Rounding error, right?

So what?
Although 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
Las Vegas Sands (NYSE: LVS  ) $55.47 $14.87 273%
Silver Wheaton (NYSE: SLW  ) $37.20 $13.04 185%
CF Industries (NYSE: CF  ) $130.00 $57.56 126%
Illumina (Nasdaq: ILMN  ) $57.57 $25.59 125%
TRW Automotive Holdings (NYSE: TRW  ) $52.17 $21.30 147%
Sirius XM Radio (Nasdaq: SIRI  ) $1.61 $0.56 188%

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 $120 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.

At Motley Fool Million Dollar Portfolio, we're constantly on the lookout for these glaring pricing errors. And when we find them, we not only bring them to our members' attention, but we're also confident enough in our analysis to invest the Fool's own money in them as well.

If you're not prepared for it, market volatility can produce the financial equivalent of whiplash, but if you know the difference between price and value, that same volatility can become your new best friend. If you realize that now, more than ever, is the time to buy the right companies at the right prices, consider joining us at Million Dollar Portfolio. If you'd rather see which companies have already made the cut, simply enter your email address in the box below to learn more.

This article was originally published Oct. 1, 2009. It has been updated.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned no shares of any company mentioned in this article. Illumina is a Motley Fool Stock Advisor recommendation. The Fool has a fairly efficient disclosure policy, with an intrinsic value significantly higher than its market price.


Read/Post Comments (8) | Recommend This Article (13)

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 November 13, 2010, at 12:31 PM, sds0099 wrote:

    I do appreciate most of Motley Fool's comments but this one (and a few others) is plain trash

  • Report this Comment On November 13, 2010, at 6:54 PM, Fredlee009 wrote:

    I disagree with you sds0099. I have never appreciated anything written by this company, and this is a "typical" example of why. No value in it, complete trash article. Only meant to bash. Nothing more. Cheap journalism, with no integrity.

  • Report this Comment On November 13, 2010, at 10:53 PM, ItAintCool wrote:

    Maybe SIRI is trading higher because it was seriously undervalued in the first place?

    A full year of profitability.

    20 million current subscribers and an ever increasing number of subscribers annually.

    Reduced Churn

    Free Cash Flow

    Paying down debt and refinancing other debt at lower interest rates.

    Now pre-installed in 70% of Autos sold in the US Market.

    Plus the ability to raise rates (and revenue in 2011).

    Apples and oranges Chuck, that's what you're comparing here. You might as well put Apple or Netflix in this list, since they had such a huge swing in the last 52 weeks as well.

  • Report this Comment On November 15, 2010, at 6:48 AM, VincentLGambino wrote:

    sds0099 & Fredlee009 must be two fools (assuming that isn't a single person posting under two pseudonyms) left without chairs when the band stopped playing. That or scammers still hoping to somehow fleece the clueless with some bogus MTLQQ scam. As memory serves, at the last quarter end before Chapter 11 filing (June, 2009), GM Corp had book assets of ~91BLN US and book liabilities of ~171 BLN US, or roughly 2:1 book liabilities to assets. In the reorg that created GM Co (New GM), pretty much any asset that was worth a damn in real-world terms (most of the 171BLN) was awarded to New GM, and the garbage assets and nearly all of the liabilities were left with MTLQQ. Since that time, the "assets" that were left to MTLQQ have proven to be worth vastly less than book value, possibly less than 10% of same, and the liabilities, particularly in the form of environmental and asbestosis issues are proving to be significantly understated. So, the actual asset value of MTLQQ could be (SWAG) $5-6BLN or so, and the actual liability value could be $150-200BLN. A very optimistic prediction might have MTLQQ with actual assets of $10BLN and liabilities of $100BLN. That does not account for one item that was part of the old GM liquidation. MTLQQ was granted limited warrants for new GM IPO common, to a fixed maximum fraction of the offering (again, from memory, I believe it was 15%). No matter, the most optimistic forecast for the value of those warrants that I have seen published has been $16-20BLN, and that was back in August when optimism about the size and value of the New GM IPO was at fever pitch. Unsecured bondholders are owed many times that optimistic number, so that gains from those warrants will go directly and completely to satisfying those debts, complete with bondholder haircuts strongly resembling the boot-camp variety. Which will leave the common stockholders of MTLQQ at least $80BLN in the hole, with that "equity" in a company with no product and no future. Far from realizing profit on their shares, the remaining fools should thank their stars that common stockholders are shielded from financial liabilities, else they would spend the reminder of their lives in the virtual poorhouse (a Darwinian case could be made for this as an earned fate).

    -VinnyG

  • Report this Comment On November 15, 2010, at 6:51 AM, VincentLGambino wrote:

    CORRECTION: Sentence 4 should read: "any asset that was worth a damn in real-world terms (most of the 91BLN)" not "171BLN"...

  • Report this Comment On November 15, 2010, at 12:55 PM, wtp32765 wrote:

    So this is what they teach at Duke and Xavier? One wonders what Mr. Saletta studied there. I certainly hope not business or economics.

    What company do you "Senior Purchases Finance Manager" for? I've never shorted a stock before, buuut...

  • Report this Comment On November 15, 2010, at 6:44 PM, VincentLGambino wrote:

    Only certifiable imbeciles or pump 'n' dump artists advocate shorting pink sheet equities of the variety guaranteed to evaporate within a few months. Care to enlighten us in regard to where you fit in?

    -VinnyG

  • Report this Comment On November 15, 2010, at 10:10 PM, TMFBigFrog wrote:

    Ok --

    Is there anyone who honestly believes that Motors Liquidation stock is really worth anything other than $0.00? And if you do believe that, why do you think you know better than the company's management and the SEC?

    In all seriousness, as VincentLGambino wrote, the company has far less assets than liabilities and has almost no ability to generate cash via operations. With a lousy balance sheet, horrendous cash flows, and a bankruptcy liquidation in process, the chances of the company's shareholders getting anything from the process are somewhere between slim and none, and slim is leaving the building.

    Disparage my education and my employment all you wish. But as Warren Buffett reportedly said, "You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right—and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else."

    Regards,

    -Chuck

    Inside Value Home Fool

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