PAR value is the stated value or face value of a security. In Kuwait, companies usually set their PAR values at 100 fils per share for the initial offering. There is wide confusion on what PAR value indicates. This is most evident when individuals think that a stock trading below PAR value (100 fils in Kuwait) is a bargain. It isn’t! PAR value is simply a number that, intrinsically, means nothing more that a transaction in the past.
However, there is a psyphological reason behind buying a stock just because it’s trading below its 100 fils par value: it’s cheaper than what the initial investors paid. I was reading the economic section of Al-Qabas daily newspaper where I found that 68 stocks are currently trading below their 100 fils PAR value compared to 46 companies in 2008. This constitutes an increase of 22 companies trading below the 100 fils PAR value. Further, 15 shares are even trading below 50 fils. This is a proof that a company trading below PAR value isn’t “cheap” per se as most stayed below 100 or even went further down. Some may be bargains, but because they are fundamentally sound companies and not because they are trading below the 100 fils PAR value. An example would be Kuwait China Investment Co which was trading at 93 fils when I recommended buying it 2 weeks ago.
Some people may argue that the Kuwait SE was down for 2009 so it makes sense that these companies continued to underperform. Regardless of what happens to the Kuwait SE, fundamentally, a stock trading below PAR indicates NOTHING. In developed markets, PAR value for stocks is only used in accounting and a stock is given the least number possible (1 cents in the US) in balance sheets. Later, an IPO price is set by the company in collaboration with investment bankers. Whenever one looks at a stock price to determine whether it is cheap or not, it is recommended to utilize valuation metrics such as P/E, P/B, EV/EBITDA etc. A vital point to remember is to look at the future earnings, not what happened in the past because the future is the only driver for a stock price.
Please refer to the chart below which was taken from Al-Qabas newspaper (Jan 8th 2010):
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Loading ...Tags: Kuwait, Kuwait Stock Exchange, PAR Value
A good advice for a beginner.
Just because a share is cheap, it may not be worthy to buy. A cheap stock may not only go down further, but also may take a long time to recover.
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