Re: Shouldn\'t all stocks trade at discount to company value?
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Firstly, define "should".
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Effecient. If stocks were priced effeciently they should trade at a discount to the value of a company as a whole. Finding a stock trading at such a discount theoretically doesn't present an opportunity unless the discount is substantially larger then would be appropriate for that paricular stock.
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EM thinks every stock should be valued at a price that implies a market average return going forward. A discount is a price that implies a greater than market return in it's future. If all stocks traded at discounts, then the market's returns would be greater than the market's returns, which can't happen in this universe.
Obviously for some stocks to be traded at a discount to their value, others have to be traded at a premium. Stocks can trade over value because it's investors perceive future growth prospects as greater, and more certain, than they actually are. High growth stocks are inherently difficult to value due to their value being in the discounted for time value of their future cash flows. Any DCF analysis of a company like that can produce large ranges of estimated values based on relatively moderate changes in assumptions. Stocks can also trade higher because of psychology like "momentum", i.e. traders continue to bid them up thinking momentum will last.
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