Valuation

Investment Analysis Clubs Saul’s Investing Discussions
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It’s obvious that several concerned posts regarding valuation have struck a chord with some board members. Yes, valuation matters. But if Saul can ignore it for the most part, it’s worth asking how. I don’t have all the answers, so I’ll just offer a few thoughts for now:

  1. Stenlis gives a great example of how SHOP may not be as risky as some think…even if they only grow revenue at a 25% clip (compared to 68% last quarter): http://discussion.fool.com/if-you-take-a-compound-growth-calcula…

  2. Smorg explains that there really is no perfect formula for what PS ratio (or any other metric) should be: http://discussion.fool.com/let39s-try-to-narrow-this-down-i-feel…

  3. I really do see both sides of this. I am a little different than Saul: I do look at valuation. In short, I want to see incredible growth, but also a reasonable price. Sometimes it becomes hard to find bargains. As I mentioned in my monthly review (http://discussion.fool.com/bear39s-portfolio-through-june-2018-3…), I’m not seeing a ton of bargains other than the 11 stocks I own and a few others I’m eyeing.

  4. Especially when bargains are scarce, I think it’s perfectly fine to keep a cash cushion. I’ve got one right now, and it is close to 20% of my portfolio. To me that percentage seems VERY high, and I will try not to let it get higher no matter how hard it is to find bargains. But I also don’t want to own only 5 stocks or anything.

  5. I would recommend never saying no to a stock based on valuation alone. Simply alter your position size a bit! If a stock I own seems too pricey, I trim it (but I force myself to trim no more than 20% in a given month based on valuation alone). If it’s a company I don’t yet own but want to, I simply take a small starter position – say, 3% or so.

  6. Lastly, if you are concerned that readers here might lose a lot of money on a stock mentioned here – please respect the board rules and simply address the specific stock. We get far too many posts questioning valuation in a philosophical way. Make it specific. Call out a stock and say why you think it’s overvalued. That’s what we’re here to do: discuss growth stocks. Everything about them, including valuation. At least that’s my understanding.

Bear

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Great approach Bear. Rec 5X

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Valuation matters, sure. If something is in a bubble. But valuation is not limited to trailing P/E or some arbitrarily defined price to sale.

One thing I have noticed is that multiples do not often decrease in stocks. That is mostly a fallacy. They do if coming out of a bubble, or if the fundamental growth or competitive advantage aspects of a company have materially worsened. But other than that multiples do not vary all that much.

Instead what changes is forward looking earnings and revenues. When the economy sours forward looking numbers are taken down as well. As this happens the multiples of stocks get even higher despite forecasts going down, and the stocks go down to re-establish their prior multiples.

So you can either wait until a deep stock market recession (or traumatic stock market “correction” and be a big buyer) or you can simply invest month after month. As when forward looking projections return, so will the top quality companies to the same multiples but now on the raised forward looking guidance.

Take for example ISRG. Even during the bottom of the 2009 crash, with the stock cratering into the $90s, it was always EXPENSIVE. At all times. In fact, if memory serves, it became even more “expensive” during the market crash as growth projections were walloped, thus making it more a “bubble” as many called it. ISRG never lost its multiple, and in fact grew its multiple during a marketcrash.

Thus, although perverse to the conventional wisdom, ISRG became a better buy with a larger price to sale, price to earnings multiple in 2009 than it was with a smaller multiple in 2008 and 2011, despite the share price being much higher during those time periods.

Things are not so simple as to look at valuations on the back of a napkin. Everyone can do that, and their illiterate half cousins. You do not make money investing in stocks doing what everyone and their illiterate half-cousins can do.

But my perspective on the whole conversation.

At some point stock multiples will increase, and that will probably be during the next hint of a recession as forward looking guidance comes down as companies start to miss. Even though the share prices will go down their multiples will probably go up.

Tinker

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5. I would recommend never saying no to a stock based on valuation alone. Simply alter your position size a bit! If a stock I own seems too pricey, I trim it (but I force myself to trim no more than 20% in a given month based on valuation alone). If it’s a company I don’t yet own but want to, I simply take a small starter position – say, 3% or so.

The last few dozen posts have talked alot about valuation, but in reality no one really knows what it is. Its a guess. Its a moving target. It involves projections about the future which by their very nature are iffy. If the very best analysts can get within 20% of what it really is it involves as much luck as anything else.

There are also many, many different metrics to use for value…PE, PS, PFCF etc… and what works well for one company or industry may not be right for another.

Bear’s point 5 here is my favorite. Just be aware of all that take into consideration when building a position.

Just what I think.

Jeb
Explorer Supernaut
You can see all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx

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We get far too many posts questioning valuation in a philosophical way.

Everybody wants to be philosopher, nobody wants the pay.

Cheers
Qazulight

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