Many investors who had never heard of timber company Woodbois (LSE:WBI) at the beginning of the year are now familiar with the company. Woodbois shares have moved around a fair bit over the past few months. Over a 12-month timespan, though, the price shows a modest increase in value of 4%.
When Woodbois shares were trading at 8p each I did not buy them. Now that I can get the same shares for 5p each, am I buying?
The answer is no – for a number of reasons. Here are two of them.
Price is not value
As the great investor Warren Buffett says, price is what you pay and value is what you get. So just because a share trades for pennies does not mean it is good value, in the same way that not all shares that cost tens of pounds are bad value.
By the same token, the simple fact of a share falling in price does not in itself make it good value. Price alone gives no indication of whether something is good value.
So just because I can now buy a share for 5p when it would have cost me 8p a few months ago is never a reason to invest, in my view. Instead, I need to look at the business prospects and decide what looks like fair value.
One way I could do that is by using the discounted cash flow model, looking at how much excess cash I expect a company to generate in future then comparing that to the current market value. If I took such an approach for Woodbois or indeed any company, it would give me a rough valuation as to what a fair value of the company may be. I could then compare that to the current share price to see if I was getting good value.
Woodbois shares and future risks
But if such a formulaic approach to share valuation is possible, why do most investors not simply use it to decide whether a share offers good value?
Some investors are not really investors at all but speculators. They buy a share simply hoping to sell it onto someone else at a higher price, without caring about the outlook for the underlying business. But even for investors who try hard to value a company, the challenge is that there are so many risks and unknown elements.
Woodbois illustrates this well. Trees can take decades to grow. Knowing now what the value of Woodbois’ forest concessions may end up being involves a lot of assumptions. On top of that, there are political risks. Woodbois’ operations are concentrated in the African nation of Gabon. Concentration in one place can increase risk if something goes wrong, and Gabon is known as a place where it can be difficult to conduct business efficiently.
I am not comfortable with the risk profile and lack confidence that 5p is good value for Woodbois shares. So I will not be buying any for my portfolio.
This post was originally published on Motley Fool
