Two and one-half months ago, TSR Corp. (TSRID) was discussed on this site as a potential value investment. Today, its price sits more than 50% higher. Did the business change at all in the last 2.5 months? Not really.
This isn’t one of those companies that saw its price rise over the course of a few months as a result of a constant stream of positive business developments. Instead, the stock price saw almost all of its gains occur on a single day earlier this week on no news, but following the execution of its one-for-two reverse stock split!
In a reverse split, the number of shares outstanding is halved (so if you owned 100 shares pre-split, you would own 50 shares post-split), so one would expect the price of each share to double, which would leave the company’s value as a whole (its market cap) unchanged. Instead, the company’s market cap increased from 50% to 100% in wild, volatile trading.
What’s going on in the mind of Mr. Market? There could be a variety of reasons why demand for this stock is out-pacing supply. Perhaps indexes have to purchase this newly created ticker, TSRID, while potential sellers are unaware that their previously-named TSRI stock currently trades under a different ticker. Either way, it doesn’t really matter why Mr. Market’s moods change; what matters is what you do with his sometimes foolish, rather illogical behaviour. Value investors who purchased this company because it traded at a large discount to its net current assets and because it was unlikely to lose value were rewarded with a handsome profit, as the stock moves from the Stock Ideas page to the Value In Action page.
Disclosure: None
