Editor’s Note: An earlier version of this article incorrectly listed Interpublic Group as having moved more than 100% over the past 52 weeks. We regret the error.
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 $0.34 apiece for its shares gives the company around a $205 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 $205 million between friends? Rounding error, right?
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:
Chipotle Mexican Grill
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 $205 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 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 click here to enter your email address and learn more.
This article was originally published Oct. 1, 2009. It has been updated.
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.
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. Chipotle Mexican Grill is a Motley Fool Rule Breakers selection. Priceline.com is a Motley Fool Stock Advisor recommendation. Sotheby's and Chipotle Mexican Grill are Motley Fool Hidden Gems selections. The Fool owns shares of Chipotle Mexican Grill. The Fool has a fairly efficient disclosure policy, with an intrinsic value significantly higher than its market price.