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Originally Posted by station
While I generally agree, it matters if you think the market has over-reacted or not, what the inherent value of the stock is, and what the long term health of the company is. The market does act irrationally both positively and negatively so it is possible to take advantage of that either way. In this case when I see the stock price sitting at 1/3 of the book value, I think that’s fallen to an irrational level. But I still don’t see this as good long term hold so I would be looking to get out at some point, probably just not right now.
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Book value is sometimes a tough metric to evaluate stocks though. You have to consider a few points. How are they depreciating their assets? And really, are you considering the pure book value of these assets or the actual "real" value. An easy way to recognize this is in cases where the company has a significant amount of inventory; is that inventory good, saleable merchandise or is it old stock that should be worth a significant discount to what it normally would be?
Really the question is whether this is a huge discount that no one else has seen and this isn't recognized in the market as a result, or whether it's the real value of the underlying assets. If it's the new value, it's a value trap.