Think Markets Are Efficient? You Won't After You Look at VinFast.

Stock markets remained volatile on Tuesday, with only the Nasdaq Composite (^IXIC 2.02%) managing to eke out a gain on the day. Economic pressures continued to weigh on the S&P 500 (^GSPC 1.02%) and Dow Jones Industrial Average (^DJI 0.40%), particularly within the consumer sector.

Data source: Yahoo! Finance.

Many investors believe that the role of the stock market is to weigh publicaly available information and establish a rational price for shares of companies across the globe. Yet to the great disappointment of economics and finance students everywhere, markets often act irrationally. On Tuesday, the price behavior of newly public electric vehicle stock VinFast Auto (VFS -3.35%) became the latest example of irrational markets.

A quick double for VinFast

Shares of VinFast more than doubled on Tuesday, going from $17.58 per share at the closing price on Monday to finish the day at $36.72 per share. Investors believed that a news release regarding the company and its electric VF9 SUV justified a big move higher for the shares, which just became available to investors through a SPAC merger a week ago.

VinFast said that it got official range estimates from the U.S. Environment Protection Agency, and the numbers were better than it had expected. The VF9 Eco model got a rating of 330 miles per charge, while the Plus version of the VF9 got a slightly shorter rating of 291 miles per charge. That's better than the 262 to 272 miles that VinFast had originally projected, although that might have been for the base model with the standard range option rather than the premium versions.

In addition, VinFast expects to charge $83,000 for the VF9 Eco and $91,000 for the Plus version. That's consistent with pricing from EV companies like Rivian Automotive as well as models from General Motors' Cadillac division and Kia.

Checking the math

With the move, the 2.3 billion outstanding shares of VinFast are nominally worth close to $85 billion. However, that's completely inconsistent with another measure of the company's value.

As of Aug. 14, Vietnamese conglomerate Vingroup owned 51.4% of VinFast's shares. Vingroup is listed in VinFast's Form 20-F filing with the U.S. Securities and Exchange Commission as its "ultimate parent" and has agreed to provide financial support to the EV company.

Vingroup isn't traded in the U.S., but it is listed on the Ho Chi Minh Stock Exchange in its home country of Vietnam. The market capitalization of Vingroup, which includes a host of other businesses, was 239 trillion Vietnamese dong, worth almost exactly $10 billion at recent exchange rates.

The current valuation of VinFast implies that Vingroup's stake should be worth nearly $44 billion. Yet the total value of Vingroup is $34 billion less than that.

Why the disparity?

The most likely reason for VinFast's sky-high valuation is that the company has only a tiny fraction of its total outstanding shares available for trading. The prospectus for the deal indicated that assuming no redemptions, public shareholders of the SPAC would hold just 2.75 million shares of VinFast stock after the business combination. Vingroup and other investment entities controlled by billionaire executive Pham Nhat Vuong would retain 99% of VinFast's outstanding shares.

At some point, one of two things will have to happen. If VinFast grows at the meteoric rate necessary to justify its valuation, then shares of Vingroup should soar. Alternatively, if investors are right in valuing Vingroup at a steep discount based on its holdings of VinFast, then it's likely that VinFast shares will see their price decline.

Whenever a company goes public through a SPAC, it's essential to look at the details of the deal and in particular the number of shares available for trading. Extremely thin floats make stock prices highly volatile and lead to market inefficiencies when cost-blind investors want to snap up shares at any price.