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The Valuation Edge is Applied Finance’s monthly newsletter to share our valuation insights with the investment community. Our goal is the 3EEE’s… Entertain, Engage, and Enlighten the investment community through what we consider to be interesting market observations, economic facts, and company expectations, to better frame the current investment environment.
We hope you join and interact with us on what promises to be an interesting long-term journey through buys, sells, and holds.
While we rarely make huge market calls and remain reluctant to do so at this point, its worth noting that growth stocks are trading at below -1.5 StdDev from historical normal levels signaling a significant move outside of normal range. This is especially noteworthy, as the growth relationship in the Russell 1000 is now at levels last observed in the peak of the tech bubble.
The False Bargain of Passive Investing
July 14, 2020
Today the irony continues, as the intellectual foundations in financial economics that underpinned Bogle’s incredible success are much less robust than they appeared in the early 70’s, yet the push for passive investing is stronger and more fervent than ever. For proactive, process-oriented, intelligent advisors this will create a great opportunity to distinguish yourself from the growing herd of “commodity” advisors who preach little more than fee minimization, rather than alpha generation or negative alpha avoidance.
Emotional Unease Creates Generational Wealth Opportunity
March 19, 2020
Only in 2008 have valuations been as attractive as now. Today, the market is essentially pricing in 0% sales growth over the next five years, not as harsh as the -15% priced in during the 2008 lows, but very harsh compared to the expected 20% to 30% growth these firms have typically delivered over a five year period. Unlike 2008 there will not be liquidity issues driving economic decisions and panicking investors. This is a confidence crisis similar to 9/11. As medical policy catches and surpasses the virus, confidence will return and economic activity will march forward. Already, in China, restaurants have reopened to crowds, and society is returning to business as usual.
Jun 25, 2000
Since the motivation for value-based metrics has been well documented, we will not dwell on the subject beyond a few paragraphs. In short, value-based metrics have become popular for two reasons. First, capital markets have forced money managers and corporations to have a renewed focus on the balance sheet. In other words, corporations are not only expected to generate positive earnings and sales growth, they also must provide an adequate return on the money they have invested. Second, accounting information, although necessary, does not by itself adequately explain market valuations nor provide comparability between firms. Exhibit 1 examines the link between earnings growth and P/E multiples for the industrial companies within the S&P 500.