Brett Caughran @FundamentEdge:
GOOD COMPANY, BAD STOCK
Identifying a winning stock is not simply as easy as identifying a company with a great fundamental outlook.
Valuation matters, and, as we have seen vividly over the last 24 months, the valuation lens can get unhinged in markets at times.
Brett Caughran @FundamentEdge:
A PM I worked with always stated that "valuation is just a point of view". That is so true, and very well put.
Valuation is a function of the current collective market view of 30+ years of FCF, and is not some perfectly knowable, fixed, precise number.
Brett Caughran @FundamentEdge:
The zeitgeist can take over, and we can all get a little nutty with our "points of view" (both on up & downside).
One of the most vivid examples of this is MSFT. I thought I would share a few slides from my MSFT case study to crystalize this point.
Brett Caughran @FundamentEdge:
MSFT has had one of the most dominant runs as a business over the last 27 years, growing from $5bn of revenue in 1995 to nearly $200bn in revenue by 2022, with only 2 years of declining revenues (both LSD declines). Revenue growth has averaged 14% over
Brett Caughran @FundamentEdge:
27 years. Pretty remarkable fundamentals!!!
Even more remarkable...MSFT's stock was underwater for 17 years. 17 YEARS! From MSFT's peak price in 1999, it took until October of '96 for MSFT to regain a high $50s stock prices.
Brett Caughran @FundamentEdge:
During those 17 years, despite a 4x'ing of revenue and EPS, the P/E steadily compressed from 65x to a low of 8x, before beginning an upward re-rating.
STARTING VALUATION MATTERS. A lesson many 2020-2021 era stock pickers are learning now, again, the hard way.
Brett Caughran @FundamentEdge:
For new investors, I recommend an FEV approach (fundamentals, expectations, valuation).
A view on fundamentals is critical, yes, but is not sufficient alone in supporting a successful investment thesis.
Brett Caughran @FundamentEdge:
Expectations and valuation tell us what is baked into the price, and more than fundamentals, an expectations gap is key in stock selection.
(and the view in '12-'13 that MSFT was not an ex-growth business led to a very successful investment thesis)
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Brett Caughran @Fundamenta1Edge:
A SIMPLE STOCK SELECTION FRAMEWORK - FEV (fundamentals, expectations, valuation)
In general, one of the biggest differences in hedge fund stock selection vs. mutual fund / long-only stock selection is style flexibility. By mandate, many long-only (LO) managers are