Maturing Into Your Valuation
Saturday, October 8th, 2011I read an interesting article today called Dead Stocks Walking. Good article, but I want to point out a few things the article missed.
The article deals with large companies that had moderately high valuations, but were still growing. Today, they are growing more slowly, but their valuations have decreased, and the stock price hasn’t moved much. What gives?
Without saying it, the article describes the transformation from large cap growth to large cap value for the largest companies. They have reached the limits of the carrying capacity of their niche in the economic ecosystem, and they now grow far more slowly.
There is a second issue — though many companies earn far more than they did in the past, many waste money by buying back stock, rather than retaining the funds, retiring bonds, or handing out dividends. Managements that buy back stock should have a firm handle on the value drivers, such that they only buy back stock at a discount to the firm’s private market value.
So, a reason many of these stocks treaded water, was that free cash flow was misused. Beyond that, they were reaching the ecological limit of their company’s habitat.
I own, and my clients own several of the companies mentioned in the article. This is a good time to own these stable companies, when they throw off low double digit earnings yields. And who knows, they may grow earnings and free cash flow from here.
