I’v often wondered why we focus so much on stock price and so little on the change in the market cap of a company (besides the fact that your profit or loss is dependent on price changes and not market cap changes). I looked at a few banks that raised additional equity during 2008/09 and compared them to the stock price, using a 100 index. I found that in most cases the change in the market cap of the company substantially outstripped the share price performance. This chart shows what I mean: http://www.flickr.com/photos/30622724@N04/5055872277/ On a market cap basis the company is near its record high, while its share price is much lower (it issued a heap of new shares in late 2008). Obviously if a company doesn’t ever raise new equity capital or unveil a buyback, this is irrelevent. But i think it may have some merit as an indication of the under or overvalued status of a stock. Thoughts?
I might be missing something, but aren’t market cap and price essentially the same thing? Market Cap changes with price and vice versa. They are both gauges of how much a company costs on the market. Price is on a per share basis while market cap is an aggregate. By market cap, do you mean enterprise value?
True, market cap changes with price, except when companies issue more equity. Theoretically the market price changes to reflect the change in the number of shares available, but in practice this does not always hold true.
When you look at the share price history of a company on Bloomberg or wherever, it will (or at least should) have been amended for any stock splits or other similar events. So share price history and market cap history should move hand in hand.
I think they adjust for splits or reverse splits, but not for buy backs and new issuances. I might be wrong though.
A lot of the value investors I know only look at market cap and enterprise value. The actual share price is subject to lots of other factors as you suggested – buy backs, share issues, dividends to some extent, etc. Additionally, just looking at the strock price ignores the impact that increases or decreases in debt have on the valuation of the company (of course, the stock price might move in response to these, but the change in debt is better capture by the EV). At the end of the day, you own a share of an entire business, not just a piece of paper representing some free floating stock on some exchange somewhere. From an analytical and a valuation perspective, it makes more sense to look at the entity in its entirety.
not sure what the argument is here - for instance, the S&P500 index is marrket-cap weighted and the index level is scaled by a divisor, which is adjusted for corporate actions such as share issuances or buybacks. The goal for the divisor adjustment is so that corporate actions such as these won’t affect the index level and introduce any extra volatility. In essence, they adjust the market caps for buybacks and repurchases (on the index level rather than individual company level) so that an increase or decrease in the index level is reflective of economic fundamentals and trading activity as opposed to corporate actions. are you arguing that this is not the right perspective? cause without the complex calculations of divisors, it seems to me that the per share price would be more appropriate to capture this “cleaner” information about the company’s performance compared to market cap
bromion Wrote: ------------------------------------------------------- > A lot of the value investors I know only look at > market cap and enterprise value. The actual share > price is subject to lots of other factors as you > suggested – buy backs, share issues, dividends to > some extent, etc. Additionally, just looking at > the strock price ignores the impact that increases > or decreases in debt have on the valuation of the > company (of course, the stock price might move in > response to these, but the change in debt is > better capture by the EV). > > At the end of the day, you own a share of an > entire business, not just a piece of paper > representing some free floating stock on some > exchange somewhere. From an analytical and a > valuation perspective, it makes more sense to look > at the entity in its entirety. This is pretty much the point I am making, although I was looking solely at market cap, not enterprise value. A company’s stock price is not adjusted to take into account share issuances (besides a normal market price adjustment - i.e the stock price will generally fall such that the market cap remains the same). Take this hypothetical scenario: Day 1: share price of XYZ Ltd is $10.00 shares in circulation are 1,000,000, so market cap = $10,000,000 Day 100: share price falls to $5.00, market cap is $5,000,000 XYZ Ltd sells/issues 500,000 shares @$5, so the share price falls to $3.33 market cap is still $5,000,000 Day 200: share price rises back to it’s 200 day high of $10.00 but the market cap of XYZ Ltd is now $15,000,000 So as an individual investor, if you bought on Day 1 and held till Day 200, you would be even, but in fact the company is now 50% larger than it was on Day 1. Also, $10.00 may be the record high for the stock price, but in fact the company’s overall value has exceeded its previous record market cap. So perhaps it’s overvalued at $10.00? Just an example. So as to my original point, perhaps the change in the market cap gives a better indication of the value (or performance?) of a company than the stock price.