Arbitrage opportunities............

Sometimes the best way to make money with minimal risk is trade on arbitrage opportunities. One such arbitrage play is to buy stocks trading below their book value and then sell them when they reach closer to their book value. The assumption is that over the period of time the market will realize that it is not worth selling any company below the book value and hence will raise the share price to bring it closer to the book value. Of course like any other investment activity we need to have caution with this approach also. However, we need to make sure that there is no potential risk of erosion of book value otherwise the virtual profits that we assumed before buying the stock could vaporize very easily. Some of these stocks that I came across recently in Indian markets are
(Book value and share price for all these companies have been obtained from www.livemint.com on 6/12/2007)

1) Hindustan Tin Works Ltd:-

Current share price = Rs. 44.65/-
Book value per share = Rs. 57.95/-
Discount in share price as compared to book value = 23%

2) Vardhaman Textiles Ltd:-

Current share price = Rs. 151.05/-
Book value per share = Rs. 189.03/-
Discount in share price as compared to book value = 20.10%

While analyzing a company's book value please make sure that you are calculating the tangible book value. Remove all the intangibles and goodwill to get the cash value of a companies asset. Also make sure you understand the company's business and quantify any erosion in book value due to future risks. These things will help you understand whether there is a real arbitrage opportunity or not.

As I have always recommended in my previous post please do your own homework before you make a buy or sell decision on any stock. If you cannot understand a company and it's business it is always better to give it a pass. There are more than 15,000 listed companies to choose between Indian and USA markets.Feel free to drop me any questions or comments on Regards,

Bargain Hunter

FULL DISCLOSURE:- I own shares of Hindustan Tin Works Ltd in my personal portfolio and have recommended Vardhaman Textiles to friends and family.

DISCLAIMER:- Investment in equity and equity related instruments is extremely risky and there is every possibility you will loose all the money that you invest. Please consult your financial advisor before making any investment decisions.