I explore this in phenomenon in more detail, drilling down into real numbers and the math behind the investments in two Substack posts that I published recently - my conclusions are similar to yours, essentially "Not All Cheap Stocks Are Cheap, Not All Expensive Stocks Are Expensive":
I recently thought about this when I did my recent write up. It brought me back to what I read about Buffett and his aha moment when he said he realized the value of American Express in the early 60's. I found an old AXP annual report and I want to say there was nothing that screamed cheap about AXP even after the scandal. I think the trading went to as low is $40? a share at the time and eps was less than $3. I think the story was Buffett wrestled with the idea of committing capital to AXP but after sitting a dinner and say an AXP traveler's check used he was finally convinced. If you look at the AXP annual, the provide a nice 10 year summary of their financials and also the count of employees and offices as well as count affiliate outlet services where customers can see an AXP rep. I think he had those numbers in his head and saw this large entrenched network AXP built and why they were seeing such rapid growth in revenue.
(background - value oriented PM at a large mutual fund for 25 years). We are all presumably trying to buy stocks which are undervalued, so by that definition every stock is a value stock (viz it will look cheap on earnings etc if you go forward far enough). The distinction I would make is this: a stock is a ‘value stock’ if we can crisply argue that it is undervalued simply based on the extant business, and growth and new business opportunities are either free or very cheap, that is to say, we do not need to underwrite years of uncertain growth to rationalize the valuation. Microsoft around the time Satya Nadella took over was an excellent example of a value stock which ultimately sprouted wings and became a growth stock—but at the time you did not need to believe in Azure, cloud or anything else, it was just cheap. I would argue that for many years investors ascribed very little value for Amazon web services and you could have justified the price of Amazon stock just based on the retail business. So I agree it’s not just about low PE; it’s about how far forward we need to predict to get comfortable. Was NVDA a value stock? I would say no, but it was clearly undervalued. I’d say buying Alphabet now at a lowish multiple because the world is worried about AI is a better example (and then the investment question is, will Google in fact be disrupted.)
You have a point. This is a really useful weekend thought post :). Thank you.
I explore this in phenomenon in more detail, drilling down into real numbers and the math behind the investments in two Substack posts that I published recently - my conclusions are similar to yours, essentially "Not All Cheap Stocks Are Cheap, Not All Expensive Stocks Are Expensive":
1. https://rockandturner.substack.com/p/lessons-in-growth-stock-valuation
2. https://rockandturner.substack.com/p/value-investors-are-barking-up-the
I recently thought about this when I did my recent write up. It brought me back to what I read about Buffett and his aha moment when he said he realized the value of American Express in the early 60's. I found an old AXP annual report and I want to say there was nothing that screamed cheap about AXP even after the scandal. I think the trading went to as low is $40? a share at the time and eps was less than $3. I think the story was Buffett wrestled with the idea of committing capital to AXP but after sitting a dinner and say an AXP traveler's check used he was finally convinced. If you look at the AXP annual, the provide a nice 10 year summary of their financials and also the count of employees and offices as well as count affiliate outlet services where customers can see an AXP rep. I think he had those numbers in his head and saw this large entrenched network AXP built and why they were seeing such rapid growth in revenue.
Wanna do an interview about it?
(background - value oriented PM at a large mutual fund for 25 years). We are all presumably trying to buy stocks which are undervalued, so by that definition every stock is a value stock (viz it will look cheap on earnings etc if you go forward far enough). The distinction I would make is this: a stock is a ‘value stock’ if we can crisply argue that it is undervalued simply based on the extant business, and growth and new business opportunities are either free or very cheap, that is to say, we do not need to underwrite years of uncertain growth to rationalize the valuation. Microsoft around the time Satya Nadella took over was an excellent example of a value stock which ultimately sprouted wings and became a growth stock—but at the time you did not need to believe in Azure, cloud or anything else, it was just cheap. I would argue that for many years investors ascribed very little value for Amazon web services and you could have justified the price of Amazon stock just based on the retail business. So I agree it’s not just about low PE; it’s about how far forward we need to predict to get comfortable. Was NVDA a value stock? I would say no, but it was clearly undervalued. I’d say buying Alphabet now at a lowish multiple because the world is worried about AI is a better example (and then the investment question is, will Google in fact be disrupted.)