The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: dungoofed on March 21, 2015, 12:19:50 AM
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Any tips/links/etc for valuing companies in the current environment?
The effect of QE on financial statements struck me the other day as I started to run some screeners on Japanese companies over the last few weeks. The spike in prices since QE began here 2 1/2 years ago has made it extremely difficult to look at trends over time as you have to look at everything with the assumption that QE will last forever, when this probably won't be the case.
The good news of course is that since it's hard to find bargains in an environment where you can easily tell the value of a company, there should be plenty of opportunities to find bargains in the current environment. Just a matter of finding a way of seeing through the fog.
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Financial statements may be rough, but what about the classic P/E? With none of that forward looking P/E stuff.
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It probably helps if I start with an example. Try Nippon Paint:
https://www.google.com/finance?q=TYO:4612
Zoom out to the 10 year graph and you'll see it was basically flat, trading at around 500-700 yen until the government opened the QE spigot, after which the stock price has shot up to 4600 yen in just 2 1/2 years. Now, since one of their major customers are auto manufacturers it is expected that increased auto sales through a lower yen will have flow on impact on companies like Nippon Paint, but an eight-times price increase for a paint company is nuts.
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an eight-times price increase for a paint company is nuts.
Not if their earnings support it.
Value them the way you always would: based on their balance sheet.
What it traded for 10 years ago is (mostly) irrelevant.
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QE is affecting the entire market, not just one company.
So its not really something to be looking at on the company specific level. Compare companies to similar companies and see which ones shine. If you think QE is inflating asset prices across the country then you will probably be better off comparing domestic companies to similar international companies to quantify any asset inflation caused by QE. And if international companies look more competitive... well, just invest in those.
On that note the PE for this is only 7. So it has the earnings to back up that price. Now are those earnings heavily influenced by QE?
(Personally I would just index.)
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Buffett said this in 2003:
"We use the same discount rate across all securities. We may be more conservative in estimating cash in some situations.
Just because interest rates are at 1.5% doesn't mean we like an investment that yields 2-3%. We have minimum thresholds in our mind that are a whole lot higher than government rates. When we're looking at a business, we're looking at holding it forever, so we don't assume rates will always be this low."