vrdiver wrote:Itsallaguess wrote:vrdiver wrote:but longer term for value creation the company shares that compose the NAV itself need to be under-valued at the time of the buyback, else the IT will suffer the same problems as any other company buying over-valued assets.
Can you explain how you come to that conclusion?
For an IT that purchases its own shares to cancel them, let's say at a 5% discount to NAV, if that transaction corresponds to an over-valuation of the underlying assets, then the under- and over-valuations net off. If, as Terry Smith has opined, share buybacks usually destroy value, then the question is whether the buy-back is creating more value than anything else that could have been done with that money - e.g. purchase of more assets that would generate more wealth.
Oh oh.... Reading the above, I see the fallacy - buy discounted shares of assets, or buy fully priced assets!
I stand corrected. (and thank you for asking the question)
Thanks - my line of thinking was along these lines when using your example and then mine -
1. (vrdriver example) - An IT sits at a discount to it's underlying NAV,
and also, those underlying NAV's are
undervaluing the individual companies - Result - '
double-whammy' value-creation, taking advantage of two distinct and separate '
undervaluation situations'..
2. (my example) - An IT sits at a discount to it's underlying NAV, but those underlying NAV's are
equal in value to the underlying companies - Result - '
single-whammy' value-creation, taking advantage of just one '
undervaluation situation'..
So I think whilst you'd be right in saying that a discounted IT which has underlying holdings that are
also being
separately undervalued by the market would deliver the ideal 'buy-back' scenario, I don't think it's necessarily the case that IT's can't still take advantage where such underlying holdings may 'just' be valued
equal to their individual NAV's by the market - it's just the case that the 'value-creation' wouldn't be quite as 'turbo-charged' as the earlier situation...
Cheers,
Itsallaguess