In the long run, a company’s stock price reflects its growth in earnings. But when we dissect the long run into short runs, we see how investor psychology drives prices.

That short-run driver manifests itself in the P/E multiple. Multiple expansion can have an oversized impact on stock prices in bull markets.

Apple is a good example.

The chart shows the change in Apple’s earnings per share (EPS) and stock price over the last 10 years. Early on, the stock price tracked the growth in EPS fairly closely. Something happened after 2019 to change that.

Here’s Apple’s P/E ratio over the same period. Continue Reading…

Finding companies that compound for decades has become the ultimate investment strategy. It’s also one of the hardest. The trouble is hindsight tends to obscure how difficult it may be.

A recent study by Henrik Bessembinder offers some insight into the difficulties investors face investing in compounders. He studied 25,775 stocks between 1973 to 2020 to find the most persistent “winners” of the bunch.

Bessembinder looked for companies that grew 5x, 25x, 125x, and 625x after its stock price reached a low point. Returns included reinvested dividends when applicable.

He found that:

Of these, 11,442, or 44.39%, achieved a 5x multiple relative to a prior low point at some time during the 48-year sample period. Among those that reached a 5x multiple, 3,306 stocks went on to achieve a 25x multiple relative to the same prior low point. The stocks that reached 25x comprised 12.38% of the full sample and 28.89% of those that achieved a 5x multiple. A total of 955 stocks achieved a 125x multiple. The stocks that reached 125x comprised 3.71% of the full sample… The stocks that reached a 625x multiple comprised 1.05% of the full sample…

In addition, 29% of the stocks that grew 5x went on to hit 25x. Of those that reached 25x, 29% hit 125x. And of the 125x, 28% hit 625x! At each hurdle, almost a third of the compounders went on to hit the next hurdle.

There are few things we can learn from his study. Continue Reading…

Value strategies aren’t for everyone. The biggest reason is you have to do the opposite of what most investors do in order to outperform.

That’s hardly a bold statement, but after testing a number of value metrics one thing stood out. Obviously, there are benefits to buying undervalued stocks. The long-term outperformance is clear.

But what might surprise most people is that value’s outperformance, on average, overwhelmingly comes during down markets. Here’s an example.

Here’s another one. Continue Reading…