Did Petrobras lose 6% of its value in one day? – 10/24/2023 – Bernardo Guimarães

This Monday (23), Petrobras share prices fell by more than 6%, while the stock market index changed little. This means that the company was worth R$30 billion less at the end of the day than the previous Friday.

This connection may seem strange. After all, the company’s production capacity has not changed. This week and last week, we will have the same people using the same equipment to extract oil from the same places. Everything the same, normal.

Still, people who buy and sell shares believe the company’s value has plummeted. Should we take this assessment seriously?

Is our best estimate of Petrobras’ market value actually R$30 billion lower than it was the previous week?

The value of a company is given by expectations of future profits, taking into account the interest rate and the risk involved.

Financial prices vary more than we would expect by looking at changes in expected profits alone. Changes in investors’ risk appetite explain some, but not all, of these fluctuations.

There is ample evidence that in many cases, share prices are in fact “wrong” and do not reflect the value of the company. Over time, these prices tend to revert towards the company’s fundamental value. Thus, whoever buys a share that is too expensive or sells a share that is too cheap loses money, on average.

Many people jump from this point to conclude that large drops in share prices like that of Petrobras are exaggerated and that it is worth buying the share, the company has not lost that much value. This conclusion is wrong.

In the recently released book “Trader ou Investidor”, written for the general public, Fernando Chague and Bruno Giovannetti show, based on cutting-edge academic research, the mistakes that people most make when investing in the stock market.

A common mistake is precisely buying shares that lose a lot of value, believing that this drop in price will reverse itself in the near future. This strategy, on average, leads to losses.

A well-documented example is OGX. In two years, the company’s value fell from R$60 billion to almost zero. As stock prices fell, well-informed investors sold, based on information about earnings prospects, while individuals bought the stock, based on the belief that such large declines are exaggerated. When the company collapsed, individuals owned more than 50% of the company’s shares.

For those interested in trading shares, the point is that large drops in asset prices do not indicate that it is time to buy the stock.

For those interested in understanding the meaning of these changes in stock prices, the point is that these large declines, on average, actually reflect a reduction in the value of the company.

Thus, our best estimate of Petrobras’ market value is in fact much lower than it was last week.

Where does this huge effect come from?

Petrobras’ statute has rules on the appointment of members to the top management. The news on Monday was that the statute must be changed. The company’s board of directors approved a proposal that eliminates some restrictions. The expectation now is that politicians will soon be appointed to senior positions in the company.

As a consequence, Petrobras is expected to make decisions that will lead to lower profits in the coming years. State-owned companies can serve different purposes. Therefore, its values ​​fluctuate a lot with the winds of politics.

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