Everyone loves a discount. But what if something’s priced below cost? In investing, that can be a red flag. Occasionally, however, it’s your lottery ticket.
When he looked at stocks trading on low price-to-book values (P/BV) – the investment world’s canonical measure of deep value situations – the Stanford University accounting professor Joseph Piotroski made an important observation. While these shares would beat the market in aggregate (or at least did in the 1976 to 1996 period on which Piotroski focused) it was a hard strategy to stomach.
Often, outperformance relied on a few big winners. The rest? Proof that apparent bargains were indeed red flags, and that discounts to book value no longer worked as they did in the 1950s and 1960s.