TY - JOUR AU - Gentry,William M. AU - Jones,Charles M. AU - Mayer,Christopher J. TI - Do Stock Prices Really Reflect Fundamental Values? The Case of REITs JF - National Bureau of Economic Research Working Paper Series VL - No. 10850 PY - 2004 Y2 - October 2004 UR - http://www.nber.org/papers/w10850 L1 - http://www.nber.org/papers/w10850.pdf N1 - Author contact info: William M. Gentry Department of Economics Williams College Morey House Williamstown, MA 01267 Tel: 413-597-4257 Fax: 413-597-4045 E-Mail: William.M.Gentry@williams.edu Charles M. Jones Columbia University Uris Hall, Room 801 New York, NY 10027 Tel: 212 854 4109 E-Mail: cj88@columbia.edu Christopher J. Mayer Columbia Business School 3022 Broadway, Uris Hall #805 New York, NY 10027 Tel: 212/854-4221 Fax: 212-932-0545 E-Mail: cm310@columbia.edu AB - Real estate investment trust (REIT) stock prices deviate substantially from net asset values (NAV). Using REIT data since 1990, we find large positive excess returns to a strategy of buying stocks that trade at a discount to NAV, and shorting stocks trading at a premium to NAV. Estimated alphas from this strategy are between 0.9% and 1.8% per month, with little risk. Trading costs and short-sale constraints are not prohibitive and the results strengthen when we control for differences in liquidity or the extent of institutional ownership. We find that some variation in P/NAV makes sense, as premiums are positively related to recent and future NAV growth. However, there appears to be too much volatility in P/NAV, giving rise to potential profits from short-term mean reversion. The closed-end fund literature has some similar findings on stock price deviations from fundamental value, but compared to closed-end funds REITs are much larger and have much higher insider and institutional ownership. These differences suggest that REIT premiums and discounts reflect more than just small investor sentiment, which is a common explanation of why closed-end fund prices deviate from their fundamental value. ER -