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Understanding the Stock Market: Tecumseh, Office Depot

The company was worth at least $820 million, or $40 per share, according to my calculations. By the way, I've increased the valuation to a range of $48 to $50 after data in the latest 10Q filing indicated that I underestimated the model's near-term margin leverage in my original calculation.

Although stocks eventually migrate to value, anything can happen over the short term. In a panic selloff, TECUA cratered to below $10 per share shortly after I paid $17 for the stock. Do you believe stock prices approximate value? Do you label a stock purchase as smart or dumb on the basis of short-term price movements? If you do, then in the aftermath of the TECUA selloff, you'd have to say that I was not just dumb, but really dumb.

To Play the Game, Understand This: Price Does Not Equal Value



The evidence is overwhelming that price does not equal value in the stock market. When was the last time a company received a takeover offer that equaled, to the penny, the share price? It doesn't happen. Look up the 52-week price range for your favorite stock, and you're looking at all the evidence you need to prove that price does not equal value. While the average business changes in value by less than 10% per year (less than 1% per month), the average stock price changes by more than 50% per year.

All stocks are mispriced. Some are mispriced by a little, some are mispriced by a lot, but all are mispriced. A value-centric investor embraces this construct when evaluating stocks. When value exceeds price by a wide margin, it's time to consider buying. Here are a couple of current examples. I expect these stocks to be more than 100% higher by the time price catches up to value.

Office Depot (ODP): The savvy analyst knows that what counts is normalized operating performance. Since prices are invariably predicated on "more of the same," prices get way out of whack in the outlier years. The nadir of the cycle is marked by excess pessimism, while excess enthusiasm predominates at the zenith of the cycle. The best investing opportunities, then, can be found in companies like Office Depot, which are temporarily operating at subnormal levels.

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