Whatever its share price or market cap might deceptively suggest, a company's actual value rarely appears in stock listings.
As Warren Buffett's mentor, Benjamin Graham, wrote: "In the short run the market is a voting machine. In the long run it's a weighing machine." In other words, there are really two prices for a company or stock at any one time: the market price, and the actual, intrinsic price.
Charles Brandes of Brandes Investment Management recently recalled what Graham taught him: "Stock prices and bond prices fluctuate in value a lot more than the actual underlying value of the security that you own. The reason for that is fear and greed, human behavior."
Don't get confused
Losing sight of this concept can mess with your investing. You might avoid certain volatile stocks, thinking that the companies' values are too volatile. But as Graham taught, the companies themselves are not changing in value -- only their stock prices are.
Consider Ford (NYSE: F). With a beta of 2.7, its stock has been more than twice as volatile as the overall market lately. Ford shares approached $10 back in June 2007, were roughly $1 in November 2008, and recently traded for more than $13 per stub. Was the true value of the company really surging and plunging so dramatically?
Though many investors thought Ford was destined for bankruptcy, I don't think the value of Ford's physical, financial, and intellectual assets truly moved that much in such a short time. The company did face major challenges, but lately it's been grabbing market share, and it's profited from Toyota's (NYSE: TM) recent manufacturing and PR problems.
Then there's long-beleaguered Rite Aid (NYSE: RAD), with a beta of 2.6 and a stock price that has careened over the past decade from $9 per share to as little as $0.20, before rebounding to around $1 today. Sure, it's troubled, carrying more than $6 billion in debt against a market cap of less tha $1 billion, and facing tough competition from Walgreen (NYSE: WAG) and CVS Caremark (NYSE: CVS), which are both more profitable and less leveraged. But many of the stock's movements are clearly due to speculation, rather than actual changes in the quality of the business. Despite big stock moves up and down, many of its financial results seem relatively stable -- albeit troublingly poor.
Volatility viewed properly
Remember, a volatile stock price has nothing to do with a company's real value. Don't be afraid of wildly swinging share prices; when they plunge, they can offer great opportunities to buy solid enterprises that are temporarily out of favor.
