Wednesday, October 14, 2015

Bloomberg? Really?

Is Wal-Mart about to go bankrupt?  Hardly.

Another stupid financial media article that confuses "market cap" with real value.  You expect this sort of thing from CNN, but not from Bloomberg.

To recap (if you'll pardon the pun), the "market cap" number is calculated by multiplying the number of outstanding shares of a company by the last known share price it traded at.   While this may at first seem like a neat way to valuate a company, it is fundamentally flawed in a number of ways:

1.  If anyone with a big share in a company (like the WalMart heirs) tried to sell their bulk shares, the stock price would plummet and they would never realize the full value of their stock.

2.  The price the last chump paid (the chump being retail investors like you and me) multiplied times the number of shares means nothing, as retail investors tend to overpay for stocks (act shocked).

3.  The market cap number doesn't accurately valuate what a company is worth in terms of liquidation value, take-over price, or whatever.  The real value of any company is usually far less than the "market cap" number - perhaps by half.

4.  Even when companies "buy out" another company, all they usually do is offer existing shareholders stock in the new combined company.   Very rarely does someone "take a company private" by purchasing all of the stock at market prices.

5.  You can't "lose money" in a company until you sell the stock.  So the Wal-Mart heirs did not lose $9 Billion yesterday or any day, except the day they sell their stock and take a loss.   Since they inherited the stock, however, they get a stepped-up basis in the stock (the value of the stock the day Sam Walton died) and thus they may not see any loss, but perhaps a huge capital gains.

6.  Phantom or "paper" gains and losses thus mean nothing, until you actually cash out of a company and realize these gains or losses.   And as the market has demonstrated over the last two months, huge losses can be replaced by huge gains - negating any "loss" in short order.

Is Wal-Mart in trouble?  Hardly.  The world's largest retailer isn't about to close its doors.   Are profits down?  Yes, but probably for reasons you would not expect.  As the economy improves, more and more people are shopping in higher-end stores.  The Internet is siphoning off a lot of sales of commodity products.   Costs of Chinese-made goods are higher.  Wages are rising as the economy improves.   There are a number of factors.

Oh, but that is boring, right?   Better to have a click-bait headline that says "Wal-Mart Heirs lose $9 Billion" so the plebes can enjoy a little schadenfreude at their expense.  And let's face it, a lot of people hate Wal-Mart and hate rich people, so they click on this utterly meaningless article in a knee-jerk fashion.

Writing click-bait is like shooting fish in a barrel.   "You'll never believe THIS secret to the tiny belly!"

Right?   You probably clicked on that, too.