Value Investors: This Stock Is Absurdly Cheap!
The Motley Fool
Published May 15, 2019 17:00
A favourite investing strategy of mine involves buying companies at a discount to their tangible net equity value (NEV) that are also buying back their own shares. To see why this is a great strategy, let’s consider a company ABC with one million shares priced at $10 dollar a share. Let’s say this company owns $12 million of tangible assets (cash, shares of other companies, and real estate) without any debt.
($12,000,000 net assets) / (1,000,000 shares) = $12 of assets per share
This is already sounding like a great company to invest in, as you can buy $12 worth of assets for just $10, but let’s attempt to predict the result when that company uses its own money to buy back its shares. Let’s say the company purchases 10% of its shares. That means purchasing 100,000 shares at $10 per share for a net cost of $1,000,000.
($11,000,000 net assets) / (900,000 shares) = $12.22 of assets per share
As shown, the net assets reduced by $1,000,000 to pay for the shares, and the total number of shares reduced by 100,000. The result of which is that the remaining shares now own $12.22 of assets per share! There has been a 1.8% increase in remaining share value. The company utilizes its own money to purchase shares, which are worth $12 each for a cost of only $10, resulting in an immediate profit for the remaining shareowners.
Companies that are in this position are rare, but one of them is Morguard (TSX:MRC) .
Morguard is a real estate holding company with $21.1 billion assets under management. It directly owns and invests in real estate in North America. Based on its 2019 first-quarter financial statements, it ended Q1 2019 with $304.99 per share of net assets. As of May 15, the price of the shares is $190.66, letting you buy the shares at a 37% discount to their net asset value.
((NEV per share) – (price/share)) / (NEV per share) = discount
($304.99 – $190.66) / $304.99) = 37.49%
It actually is even more attractive when you consider the company’s share-buyback program. We can look at SEDAR filings and see that the company has retired shares at a price in the $180’s per share, representing an average discount well above 30%.
The discount in the stock price could be attributed to Morguard’s exposure to Alberta and headwinds with the advent of Amazon (NASDAQ:AMZN) and e-commerce. Morguard has equity exposure in two subsidiaries: approximately 33 million shares of Morguard Real Estate Investment Trust and seven million shares of Morguard North American Residential REIT.
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If the company keeps buying back its shares, it should be a excellent investment over the long term, and if the share discount to the net asset value decreases from the current 37.5% to a more acceptable 10%, the shares could be sold at a healthy profit or help for the long term in the stewardship of Morguard’s enterprising CEO, Kuldip Rai Sahi.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of Amazon. Fool contributor Nikhil Kumar has no position in the companies mentioned.
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This Article Was First Published on The Motley Fool
Written By: The Motley Fool
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