Is there a ‘Bubble’ in Quality?

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Conservative principles of valuation suggest that one could be neutral between a ‘0 growth’ company and a high quality bond. Therefore seeking earnings yield of 6-7% or roughly 15x PE may not be irrational. Paying a higher multiple implies a growth expectation. Using the same principle, assuming no significant changes in general level of interest rates 10 years hence, it may not be unfair to give a 15x multiple to a no growth entity. Therefore, a 20x multiple already assumes some growth even beyond 10 years.

Put differently applying a 20x multiple means that in your judgement the business would be able to demonstrate growth not for 10 but maybe 20 years or beyond. Most would agree that the risk that we may end up rationalising the unknown is high. In this light applying 20x in our view is aggressive enough. Going even further may be nothing short of pure adventurism.

To summarize, while not all, valuations of some quality companies seem to have overshot their intrinsic growth potential by a fair margin. While buying today or holding on to these ideas may not result in permanent loss of capital given the inherent growth in many companies, those investing today should be prepared to face sub optimal returns over elongated periods. Investors would do well to be careful in their stock selection in the current environment.

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https://manufacturedluck.blogspot.in/2015/04/is-there-bubble-in-quality.html