There is much less on mispricing. Would be interested in starting a discussion on this...
Going back to first principles, why do things become mispriced?
- investors are missing something (analytical, informational)
- investors are exaggerating something (behavioral)
Almost all of the reasons behind mispricing fall into one of those two buckets (although there are multiple forms)
Less has been written about how this happens in practice…
The key question relates to the extent to which those problems are temporary vs structural. Perhaps inverting is worthwhile here...
I have approached this from my own experience, and by screening for European companies that have declined 70% or more and never fully recovered, then analyzing them...
- too much debt (bankruptcy)
- single product in fast moving industry (fads)
- large customer or supplier (going concern risk)
- technological change (obsolescence)
- poor accounting (frauds)
- legal liability (payouts that can’t be met)
- poor industry structure (new/different trends, oversupply)
- regulation
Interested to hear of any others I’ve missed!
Again, interested to hear input from people
I’ve often seen sell side analysts (and indeed many buysiders – including me) not model this correctly
For example, I remember looking at Rightmove years ago. I read quite a few notes on the company. Quite a few analysts got the growth right
I’ve found that things get missed most in three situations:
- spinoff in a different segment/industry to core business
- spinoff has different geographic exposure
In each case, the historic investors are likely to sell almost irrespective of fundamentals, which are thus missed
The company under-earns over the short term, but the NPV of those investments is potentially substantial. Recent examples of this include Netflix, Zooplus etc.
Or any other views and experiences people have on mispricing, including any interesting reading material. Thanks!