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Where are we now?

There are always themes that seem to draw investors. Often, they make some sense, but are taken way to far, when price moves reinforce the positive view, and this pushes up price further, which makes more people feel positive about the investment and so on.

We have seen many such moves in the last few years. At one stage everyone was obsessed with how low interest rates were and how hard it was to generate income. Investors flocked to the banks and Telstra and when they were let down, they switched funds to other companies where the income was more reliable. You can see them jumping from one to another and pushing down the price as they exit and pushing up the price of the next hopeful.

In part due to phenomenal performance of the “FAANG” companies in the US (Facebook, Apple, Amazon, Netflix, and Google) and in part due to the very low growth across much of the Australian market, everyone has become a growth investor. Just invest in companies that are growing and sometimes it appears at any price.

PE’s or Price / Earnings is a measure that is used to determine if a share is cheap or expensive. It can also tell us about investor’s expectations for the future. You would only pay more now for a given set of earnings (profits, rent) if you think the earnings will increase more rapidly or if you think they are more secure, higher quality earnings.

Over the long-term “value” investing has outperformed “growth”. This means looking for undervalued stocks which are unloved for some reason at the time. Growth investors are looking for companies with high earnings growth. It does not take much imagination to guess which stocks catch investors’ eye. It is very likely that everyone knows about the companies with fast growth. Alarm bells ring when we start to hear value is dead because of the remarkable and unusual period of outperformance of growth companies.

While we believe the big five (although we prefer three) are juggernauts (never have companies of this size seen such consistently high level of earnings growth), with regulators the biggest risk, there have been many second and third-class companies dragged up by the rising tide.   

The tech boom was a failure for investors, because they paid way too much in terms of hope and expectation (if they were thinking in any way at all). If you invested in Amazon or Google in the early days you would be a very happy investor, but they were just a tiny minority of all the flops that fell by the wayside.

At Intralink we do not really see the distinction. We always want to buy at a good price, but it is true that you are unlikely to get the big discounts on quality growing companies. Those sorts of companies we are trying to buy at a reasonable price as they will never be outright cheap. The issue is not to get carried away as if everyone agrees with you and huge expectations are built into the price.

For us, the question is what the share price is saying about the assumptions being made (you can work this out with maths if you understand valuation). A share priced based on the expectation of great results will fall in price if they are only good, while a company priced on pessimism, may do very well on average results.

For further information or to discuss how we can help you, please speak to your advisor.

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