July Dividend Growth Newsletter
publication date: Jul 1, 2020
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author/source: Brian Nelson, CFA
"The COVID-19 pandemic has all but shown it's not the economy, or next quarter's earnings, or last year's book-to-market ratio or last year's P/E ratio that drives market prices and returns; it's enterprise valuation. Read about the duration of value composition in Value Trap." -- Brian Nelson, CFA
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Hi everyone!
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Trust you are doing great. I thought we could all share in on a little chuckle with this meme of Mr. T. I've been working for years and years explaining how important enterprise valuation, or the discounted cash flow process, is to understanding stock market prices and returns, and how most valuation ratios such as the P/E ratio, for example, are ambiguous, non-causal curiosities.
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Today, most investors are picking stocks like they are betting at the track. They like to buy low P/E ratio companies (value traps) just like they may want to bet on the jockey with green silks, or they want to own stocks with high book-to-market ratios just like they pick the same three numbers each race for a trifecta. They stick with these strategies, hoping they pay off in the long run. You and I both know this is just gambling.
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Investing is a much different proposition that just buying the latest and greatest factor (there are now more than 300+ academically defined factors today). It's really getting out of hand. I hope that I've shown you time and time again that it is enterprise valuation that drives stock prices and returns--not only with our huge call on MLPs years ago, but throughout this crisis.
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Quite simply, if I thought economic data was causal to stock market returns, I would have written an economic textbook. If I thought last decade's CAPE ratio was informative, I would have expounded on the P/E ratio. If I thought quarterly earnings were important, I would focus on quarterly beats or misses.
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The reality is that I firmly believe stock prices and returns are based on the core concepts of enterprise valuation. I wrote Value Trap because most investors are completely missing the boat in understanding the causal drivers behind stock prices and returns, just like many have missed this bull market run. This is why we're seeing this huge rally >>
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In any case, our best ideas continue to perform fantastically, and I sincerely hope that you have been paying attention. Remember -- we use our methodology and research on the website to highlight the best ideas in the newsletter portfolios. Our newsletter portfolios highlight our best ideas. Download the July edition of the Dividend Growth Newsletter here (pdf).
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We're available for any questions!
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Thank you,
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Brian Nelson, CFA
President, Investment Research
Valuentum Securities, Inc.
brian@valuentum.com
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Tickerized for companies in the DIA.
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Brian Nelson owns shares in SPY and SCHG. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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