A few days later, my colleague shared the comment of a JP Morgan analyst on a completely different, popular stock, which concluded as follows: “… and continue to view company Y as an elite software company and a top consideration for non- valuation-sensitive strategies.”
“Non- valuation-sensitive”? In the category of euphemisms, I found the expression rather funny. Translation: The stock is too expensive, but that doesn’t matter.
However, I believe that valuation is always capital in investment, at least in the medium and long terms. As we commonly say, “everything has a price” and the price paid for everything is fundamental. If I made you an offer of $200,000 for your home, you’d probably reject it without considering it for more than two seconds – you’re not a seller, after all. But if I come back to see you the next day with a $2 million offer, you’re more likely to listen to me, right?
What good does it do me to know if the company is a leader in its industry, that its growth prospects are favourable or that its leaders are peerless if it is not to estimate the value of this company?
In the case of a company with less favourable prospects, does it make sense to say that you are not interested in investing in it at any price? Isn’t there a price that is appealing enough to make you change your mind?
All the work of a financial analyst or investor relies on their ability to value a business. He must measure many aspects of that business and use that analysis to come up with a reasonable valuation. If all is well and the outlook is favourable, he will give a higher rating. If, on the contrary, the outlook is less favourable and the risks are higher, he will give it a mediocre assessment.
And what about the risks? In the insurance industry, for example, you will always find an insurer to cover any kind of risk. The riskier and more unusual (non-standard) a coverage, the higher will be the insurance premium. The insurer does sort of the same job as the financial analyst – he assigns a price, a valuation, to the risk involved.
In my opinion, it is inadmissible and dangerous for an analyst to say that the valuation of the security he has analyzed is not important (either for an expensive or inexpensive security).
At the same time, it is precisely this way of thinking of a fringe of investors that creates anomalies in the stock markets. It is when a group of investors believe that the valuation of a security or a sector is unimportant that we find the extremes of valuations that we saw during the tech bubble of the late 1990s.
At the same time, when you read that a security should not be bought even if it is significantly undervalued on a fundamental basis, there is a good chance that you have identified a very attractive investment opportunity. Isn’t that what happened during the 2008-2009 financial crisis when many investors panicked and decided to sell at all costs?
Never say never and never say that the valuation of a security doesn’t matter.
P.S. I will be taking a break for the holiday season starting December 18 and will be back with a blog on January 7, 2022. I wish you Happy Holidays and a Happy New Year 2022. Health and prosperity! Please feel free to email me your questions or comments.
