Market Value: When and To Whom?

In his Tuesday piece in the Wall Street Journal, Dennis Berman refers to situations in which executives,

"were trying to use overpriced shares to buy other companies in stock deals before the market came to its senses....executives don't dare broach- that their shares might be overvalued."

What does it mean to simply state that a company is "overvalued?" By whom? Or that the market is not 'in its senses?' Over what timeframe? Do such an unconditioned terms or statements even make sense?

Can anything be "overvalued" today? I think not. As my wise old friend and colleague, B, noted some years ago,

"A model can tell you what X was worth yesterday, or what it may be worth tomorrow, but today, it is worth what I can sell it for in the market."

Just so.

And, further, today's market price, or value, for a company, is a function of many buyers and sellers, and non-buyers and non-sellers, whose various and varying expectations constitute the forces which drive the actual price of shares of a company.

In fact, there are so many conditions on the question of "value," much less "overvalue," that it boggles the mind to consider them all.

For example, if I sell one share of a stock I currently hold, Gilead Corporation, it is unlikely to affect the market value of the company. I am essentially a price-taker. However, suppose I own 4% of the firm- a level below that requiring certain SEC filings. Suppose I wish to sell all but one share of my 4% stake in Gilead, today. Would this action affect the company's value? Almost certainly. The flooding of nearly 4% of the ownership in a company into the market at once will change its value very quickly, indeed. It may result in a price decline sufficient to bring in more buyers, who now think the company is "undervalued," relative to their own expectations, and perhaps move the market value back up again.

Thus, the use of sloppy language, such as referring to a company, or its stock, as simply, unconditionally, "overvalued," or "undervalued," obscures clear understanding of the mechanics involved in the valuation of companies. In an open trading market, a company is always "fairly" valued at the moment. That value may appear to be too high, or low, to different investors, or potential investors.

To address Mr. Berman's point regarding "overvalued" companies, I would suggest that what is meant is that there are situations in which a company is "overvalued," in the opinion of some people, relative to some other company. In such cases, there may, indeed, be takeover activity.

But that's not to suggest that either company was "wrongly" valued that day. Or on any other trading day.

"Value" is what you can get for something in a market. Any other "value" ascribed to the item is only a relative estimate, which is itself a function of a particular investor's expectations. Nothing more, and nothing less.