Yield Chasers beware
“Market price and intrinsic value often follow very different paths – sometimes for extended periods – but eventually they meet.” (Warren Buffett)
Those that are chasing yield regardless of the intrinsic value of the companies they are investing in may start to believe their own hype, but at some stage the intrinsic value will catch up to them.
Some companies are barely growing and yet their shares are growing at 50% a year. To a rational person, something doesn’t feel right.
A company which is growing at low single digits should trade at a relatively low multiple of its earnings. Many of these companies are trading at mid to high teen multiples and some are even trading in range of the low 20 multiples of their earnings. Add in the fact that many of these higher yielding companies have quite high debt and you have to lower their intrinsic value further to account for the risk.
These companies have diverged significantly from their intrinsic value and may stay there for a while, but eventually those holding them will have their capital withered back to fair value.
The rising tide has lifted all boats. Beware the belief that your boat can fly.
At Valor Private Wealth, we are finding it very difficult to find companies that are trading at or below our estimates of fair value at present. We would still prefer to own 4% cash than own a company which is double our estimate of its intrinsic value (of which there are plenty). There are still a few gems out there, but they are becoming a rare find.
Our total stock market to our economy is around 110%. Be fearful whenever this ratio is greater than around 90%. Be even more fearful when our economy has a higher probability of retreating at some stage in the next few years due to a slowdown in China.