February 6, 2012 at 6:40 pm #17568
As Bill once pointed out, during deflationary times and when the masses will realize that the recovery they are expecting was phony, will P/E ratios undergo a complete reconfiguration and recalibration? Add in the end of the age of cheap energy, credit fueled boom and perhaps a phase where no growth in Western economies will become the norm, what does that do to traditional analyses and valuation techniques that have been used for decades now? For that matter, are the Family Office stock market equity investments also at risk of this global revaluation of equities when valuations (read confidence of the market in companies) will be cut by say half of current levels? Maybe we are looking at a new age in stock market history. What this means is that companies with stellar earnings and great balance sheets will also suffer – their value as perceived by the market will be cut in half. At the end of the day, even these companies rode the credit fueled boom, so may be it is time for them too to go back to valuations they had 10 or 15 years ago…and be valued at levels that represent “real wealth” driven growth. Once such a phenomenon happens, the impact won’t just be on Western markets and economies, the emerging economy valuations too will begin to follow the new age of stock valuations. More so because most companies are today global or have strong linkages to the global economy.
Maybe we’re transitioning from an era of excessive leverage and aggressive valuations of stocks to one of right leverage and permanently conservative valuations (recalibration of the valuations paradigm altogether).
Does someone else strongly feel this is going to happen? I certainly do.
-ShankarFebruary 9, 2012 at 6:37 pm #27146
Hi Shankar, I agree. I think all valuations will be negatively impacted from a no growth environment in the developed world. However, I think companies will continue to place greater emphasis on returning capital to shareholders and markets will reward management teams for doing so. Growth will definitely decline in the developed world and multiples will contract. I just think all the $$ sloshing around have to go somewhere and people will pay more for a company/management team committed to returning money to shareholders. Basically, I think markets will be less inclined to pay for growth and more inclined to pay for buybacks or dividends. But to your point, I do agree multiples on the whole will contract and all the more reason for us as investors to be so focused on VALUE!!February 10, 2012 at 6:38 am #17865
I agree. Wall Street has duped us into thinking that P/E > 10 are a good return on investment. I dont think anyone would start a private business with an expected roi < 10%, so why have we been so enamored with stocks that provide less. Cash is king, and dividends are the result of success. Capital gains and stock price, which Wall St and MBA programs have tried to convince us is an equal alternative, is merely a Ponzi scheme. Dividends and cash flow are all that matter, otherwise, you may never realize the return. Perhaps investors will return to private equity with p/e < 5 are more the norm. Wall Streets sole purpose for existence us the efficient allocation of capital for worthy investments. When it becomes a casino and ponzi scheme for the masses, private equity investments with much lower P/E ratios and cash distributions will hopefully become more attractive….and that is where the real advancements and capital are needed anyway.
- This reply was modified 5 years, 11 months ago by Adam Wilson.
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