It’s quite common in the financial media to see coverage that frames buyers and sellers as athletic competitors. An analyst or an investor may declare that a technical support level is safe “unless the bears step up,” or allude to buyers “defending” a particular level.
The analogy begins to break down when investing is covered like a game of football, with a discrete start and finish and a predetermined length of play.
In football, there are momentum shifts, touchdowns and fumbles. Game strategies and tactics change as the clock runs down: when behind, a team becomes aggressive in its efforts to win, while when ahead, it becomes more conservative.
This approach makes immense sense for winning a football game, but it makes no sense for winning the long-term investment game.
Yet, we see game-clock mindset used frequently in the financial press. The writer will describe how this or that stock is performing year to date, as if all stocks started at the exact same place on January 1. Perhaps more misleading, the writer will then sometimes suggest that because a stock is a year-to-date laggard, it is due to rebound.
Recently, a highly respected financial publication illustrated how three major companies in an industry were bargains because their shares had lagged the S&P 500 since the start of 2023, despite having better growth prospects, healthy pricing power and more defensive stock performance traits. The article then said that this weak relative performance made their valuations more attractive than they had been in many years.
While its points were technically true, the article missed two key points that long-term value investors find critical. First, is valuation. These three stocks sounded like bargains, but they were far from cheap. The average P/E multiple on 2023 estimated earnings was 27.4x, an elevated valuation for any mature company and twice the valuation of the S&P 500. True, they were less expensive than their still-higher valuations three months ago, but hardly a bargain.
Second, looking further back than January 1 (beyond year-to-date performance), these stocks are by no means laggards. In the past 12 months, the group outperformed the broad market by nearly 15 percentage points, gaining 7% while the market slid 8%. Over the past five years, the outperformance was even stronger: rising nearly 80% compared to the S&P 500’s more modest 50% increase. And, the group doubled the market’s return in the past decade.
Value investors will want to consider the entire picture before investing in a stock. This includes evaluating not just today’s fundamentals, valuation and year-to-date performance, but where they have been over the past three, five and even ten years or more. Over time, patience and discipline with basic blocking and tackling will likely produce a successful investing career.
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