|New Threads Only:|
|New Threads & Replies:|
Forum List » Guru News and Commentaries|
Guru News, Stock picks and commentaries
Horizon Kinetics Market Commentary, September 2013 - Liquidations
Posted by: Grass Hopper (IP Logged)
Date: October 4, 2013 02:07PM
This month’s commentary concludes our series on predictive attributes with a discussion of liquidations. These are an extremely interesting type of investment, but they are incredibly rare.
Defining the Asset Class
A liquidation occurs when a company’s operations are brought to an end, and the assets of the company are redistributed; this may be the result of bankruptcy proceedings, but is not necessarily so. Generally, liquidations trade at a discount to their liquidation value for a host of reasons. One is simply the nature of the equity yield curve. At the end of a liquidation, the object is to have collected the maximum amount of cash. The security should then be worthless, regardless of how long it takes to liquidate. However, the pace of liquidations—and therefore the shape and length (in time) of the return curve—is unknowable. The process generally depends on either selling assets or collecting revenue under a license or royalty agreement, and then making distributions to shareholders. However, the rate of revenue collection can change for many reasons, and the inability to predict that rate generally means that a liquidation trades at a significant discount to its liquidation value.
There is another reason liquidations trade at a discount to their liquidation value. The requirements of generally accepted accounting principles (GAAP) are such that, in some cases, the auditors must use liquidation accounting. This requires auditors to calculate the equivalent of a unit value for the company in liquidation, just as in a fund. It is still a company, and may still have an operating business, but it is not reinvesting its capital; therefore, it does not have a growth rate that can be reflected in its return on equity (ROE). Generally speaking, there is a tendency for these securities to trade at a discount to net asset value.
Continue reading here.
Stocks Discussed: FRMO,
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.