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 $0.61 apiece for its shares gives the company nearly a $400 million market cap. That is 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 in spite of heavy enough volumes 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 $400 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
|
|
Google (Nasdaq: GOOG )
|
$561.64
|
$247.30
|
127%
|
|
JPMorgan Chase (NYSE: JPM )
|
$47.47
|
$14.96
|
217%
|
|
Chevron (NYSE: CVX )
|
$81.92
|
$56.12
|
46%
|
|
Goldman Sachs (NYSE: GS )
|
$193.60
|
$47.40
|
308%
|
|
Schlumberger (NYSE: SLB )
|
$71.10
|
$35.10
|
103%
|
|
Amazon.com (Nasdaq: AMZN )
|
$125.68
|
$34.70
|
262%
|
|
Target (Nasdaq: TGT )
|
$51.77
|
$25.00
|
107%
|
Data as of Nov. 5, 2009, courtesy of Capital IQ.
Every last one of them has swung around wildly within the space of a year. If the were truly an efficient arbiter of companies' fair values, such swings would be rare enough to be virtually nonexistent.
Yet whether it's in the form of a $400 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. What this means to you is simple. 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
Regardless of what 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 Inside Value, we're constantly on the lookout for these glaring pricing errors. We love the opportunities we're seeing thanks to the market's recent wild roller coaster swings. If you understand that Motors Liquidation is a worthless stock -- trading as though it were anything but -- then you've got what it takes to join us in our quest to beat the market.
That focus on what a company is truly worth is so fundamental to our way of thinking that it's the centerpiece of our scorecard. To see that scorecard with all our picks, and to discover just how large a gap there is between what the market thinks and what those companies may truly be worth, click here to start your 30-day no-obligation free trial.
This article was originally published on Oct. 1, 2009. It has been updated. A previous version of today's edition used incorrect data for Chevron in the chart above; the Fool regrets the error.
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. Google is a Rule Breakers recommendation. Amazon is a Stock Advisor pick. The Fool has a fairly efficient disclosure policy with an intrinsic value significantly higher than its market price.
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