The High Price of Cool Stuff: An Update on Stocks Valued Over 10x P/S.
Lucid Motors Logo: A Symbol of the Future?
It’s been a hot stretch of summer for the KCR equity research team. We have, at times, been accused of writing dry and dense material with an intermittently academic tone. Not today. First Friday in August. Let’s talk cars.
In 1999, Warren Buffett gave a rare explanation of why he felt the stock market would generate poor returns for investors over the long haul. He used simple arithmetic to show that elevated valuations and profit margins made equities vulnerable. The piece was 9 pages, over 4,000 words long, and had a single exhibit.
Mean Reversion Made Simple - This paper provides simple context to what are often difficult and highly emotional decisions around money. KCR spent much of 2020 and 2021 producing evidence that the valuations of popular fast growth stocks would lead to their demise. Since the peak in 2021, stock speculation has gone from popular to perilous.
US Large Cap Core Funds: Historical Weights at Various Levels of Valuations - To summarize, historically, investors in large cap core index funds had the bulk of their money invested in stocks with reasonable valuations with negligible exposure to stocks valued over 10x price to sales.
The phrase “I got Enroned” has entered the investing lexicon recently. KCR believes the term is slang to describe the losses being incurred by investors in stocks with indefensible valuations and low-quality accounting. This piece updates our January work identifying the stocks most like Enron today.
Beginning in March of 2021, KCR’s quantitative research has provided consistent evidence that Staples and Energy stocks present investors with the opportunity to buy companies of high quality for unusually low prices. Subsequent to our evidence-based models’ endorsement, we engaged in a fundamental review of both sectors and the specific stocks our models favored. Steeped in academic research done by the most respected names in behavioral finance, our models continue to advocate for select securities in both sectors. Our fundamental overlay continues to validate those findings.
We get asked this question. A lot. Investors, scorched by multiple expansion in speculative stocks, are understandably concerned about the movement of prices in oil and gas. We believe the reason to invest in oil stocks stems from a fundamental backdrop for the sector, unlike anything we have seen in our careers.
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