Stock Prices and Pricing Fairness

We have repeatedly stated that the most important stock market’s index is its liquidity index. After its reorganization, Boursa Kuwait managed to raise its liquidity fundamentally. Its liquidity during the first six months of the current year rose by 166.2% vis-a-vis liquidity of the first six months of 2018 and increased by 105% for the first nine months of this year compared with the same period of 2018. This is a good development that supported the general market index which gained 10.7% during the same period. However, there remained a disorder that should be fixed, i.e. that the rise in liquidity and capital gains that followed remained deviant and it was reflected positively on liquid companies’ prices and perhaps negatively on non-liquid companies which are much more in number.

A look at the margins of market price differences and their book values might be enough to initiate a professional and systematic effort to reduce them in favor of non-liquid companies. That could be achieved by marketing investment feasibility therein through the support of their liquidity. Figures from actual financial statements published until 30/06/2019 indicate that the stock prices of 14 listed companies, or about 8% of the total number of listed companies, exceeded by twice their book value and about 25 other companies whose stocks prices in the market exceeded their book value in the market by 1%-99%.  This means that only 39 companies or 22.3% of listed companies number whose market prices for their stocks exceeded their book value.

On the other hand, there are 75 companies or about 42.9% of the listed companies number which are sold at 50% discount of the book value of shares and more, 42 companies or about 24% of the listed companies number are sold at a discount of between 30% -49% on the share book value. This means that about 67% or two-thirds of the listed companies are sold at a discount to their book value by 30% and more. In addition, there are 19 other companies whose stocks are being sold at a discount of about 1% to 29%. The situation will not be any different if the comparison is done on the status of listed companies at the end of September, but the financial statements of the companies are not yet available then.

It remains fair to say that some of the negative margin between the market price and the book value is justified. The global and regional troubled conditions favor liquidity. Besides, some doubt about the accuracy of book values is acceptable and justified. But when the difference affects this large number and with those wide margins of discount, no doubt that it is a phenomenon in need of cure. This cure will not be more than an effort to limit the unnecessary supply, i.e. filtering the listed companies and boosting the demand side by completing stock market reforms by more transparency and support to the market making, and then raising awareness of the good companies’ conditions.