Money and Finance
- Howard Marks On How Earnings Lead To Stock Appreciation
From "Returns and How They Get That Way" (November 2002):"The vast majority of stocks are bought for the stream of earnings the companies produce. But how do those earnings affect investors – get through to investors – if not in the form of dividends?...
- Hussman Weekly Market Comment: Whack-a-mole
As of last week, the S&P 500 has declined to the point where we now expect 10-year total returns averaging about 5.7% annually on the index. This is certainly higher than the 3.4% prospective return we observed earlier this year, but is still a prospective...
- Hussman Weekly Market Comment: Don't Take The Bait
Investors who allow Wall Street to convince them that stocks are generationally cheap at current levels are like trout - biting down on the enticing but illusory bait of operating earnings, unaware of the hook buried inside. I continue to urge investors...
- Bemis Company, Inc. Dividend Stock Analysis
As part of building a diversified dividend growth portfolio it's important to own not only a number of companies but also companies that operate in a variety of industries. Previously I've looked at some restaurants, beverages, and consumer staples...
- Earnings Per Share Or Free Cash Flow: What's The Difference?
The quick and clean method of determining a dividend's safety is by the payout ratio. The payout ratio is calculated by taking the dividends per share and dividing it by the earnings per share (EPS). It's fairly easy and straight-forward and...
Money and Finance
Mark Sellers: Take advantage when good companies come to market
As it turned out, Google’s stock was incredibly cheap at its IPO price of $85. Over the following year, the company’s actual (not estimated) earnings turned out to be $4.27 per share. This meant that it was priced at just 19.9 times its forward earnings on the date of its IPO, though no one knew that at the time.
-
We can learn something valuable from this historical analysis: great companies are often treated by the market as if they are merely average companies when they first become public. Over the first four to six quarters as a public company, expectations rise as analysts come to appreciate the company’s competitive position. At the same time, analyst estimates become more clustered around a consensus, which gives investors more certainty about the company’s earnings outlook.
We can learn something valuable from this historical analysis: great companies are often treated by the market as if they are merely average companies when they first become public. Over the first four to six quarters as a public company, expectations rise as analysts come to appreciate the company’s competitive position. At the same time, analyst estimates become more clustered around a consensus, which gives investors more certainty about the company’s earnings outlook.
-
The interaction of these two factors causes a “double-whammy” effect: not only do earnings expectations rise, lowering the forward p/e ratio, but the risk premium priced into the stock falls. In other words, both the earnings outlook and the p/e ratio go up. These two factors work like a slingshot, causing the stock price to rise dramatically. Google, for instance, saw its stock rise from $85 to $280 in its first year of trading as earnings estimates rose and the p/e ratio expanded.
The interaction of these two factors causes a “double-whammy” effect: not only do earnings expectations rise, lowering the forward p/e ratio, but the risk premium priced into the stock falls. In other words, both the earnings outlook and the p/e ratio go up. These two factors work like a slingshot, causing the stock price to rise dramatically. Google, for instance, saw its stock rise from $85 to $280 in its first year of trading as earnings estimates rose and the p/e ratio expanded.
...
There are two fundamental factors all these companies share. First, they have an “economic moat”, or natural defence against competitors, allowing them to generate high returns on capital. Second, they have lots of operating leverage (as opposed to financial leverage); in other words, a 10 per cent increase in revenue translates into far more than a 10 per cent increase in bottom-line profits. Operating leverage is almost always underestimated by analysts when they are not very familiar with a company.
-
When a company with these two traits begins to trade publicly, analysts are too cautious at first. They do not know the company that well, so their estimates are all over the place. Investors can play this to their advantage by buying and holding great companies when they go public, ignoring what pundits or analysts say and betting that analyst estimates will rise and become more clustered, causing the p/e ratio to rise at the same time as earnings expectations.
When a company with these two traits begins to trade publicly, analysts are too cautious at first. They do not know the company that well, so their estimates are all over the place. Investors can play this to their advantage by buying and holding great companies when they go public, ignoring what pundits or analysts say and betting that analyst estimates will rise and become more clustered, causing the p/e ratio to rise at the same time as earnings expectations.
-
Excess investment returns come from buying an asset when the market’s expectations are too low, and selling when expectations are too high. Nowhere are expectations off so much as when a great company first trades publicly.
Excess investment returns come from buying an asset when the market’s expectations are too low, and selling when expectations are too high. Nowhere are expectations off so much as when a great company first trades publicly.
- Howard Marks On How Earnings Lead To Stock Appreciation
From "Returns and How They Get That Way" (November 2002):"The vast majority of stocks are bought for the stream of earnings the companies produce. But how do those earnings affect investors – get through to investors – if not in the form of dividends?...
- Hussman Weekly Market Comment: Whack-a-mole
As of last week, the S&P 500 has declined to the point where we now expect 10-year total returns averaging about 5.7% annually on the index. This is certainly higher than the 3.4% prospective return we observed earlier this year, but is still a prospective...
- Hussman Weekly Market Comment: Don't Take The Bait
Investors who allow Wall Street to convince them that stocks are generationally cheap at current levels are like trout - biting down on the enticing but illusory bait of operating earnings, unaware of the hook buried inside. I continue to urge investors...
- Bemis Company, Inc. Dividend Stock Analysis
As part of building a diversified dividend growth portfolio it's important to own not only a number of companies but also companies that operate in a variety of industries. Previously I've looked at some restaurants, beverages, and consumer staples...
- Earnings Per Share Or Free Cash Flow: What's The Difference?
The quick and clean method of determining a dividend's safety is by the payout ratio. The payout ratio is calculated by taking the dividends per share and dividing it by the earnings per share (EPS). It's fairly easy and straight-forward and...