Is there a ‘Bubble’ in Quality?

Discussion in 'Must-Read Interviews, Articles & News Items' started by Vidhi Khanna, Apr 25, 2015.

  1. Vidhi Khanna

    Vidhi Khanna Active Member Staff Member

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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
     
  2. arghya

    arghya New Member

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    It's not exactly 'Bubble' because there are very few co.'s available in the market which offers good sales,roce,profit growth. This co.s are likely to correct time wise because they are at very high multiple and from here the expansion of valuation is quite impossible(if they can grow at more than 40%+ then the growth will continue).
     
  3. Kumar

    Kumar Member

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    40% + is very difficult for long.
     
  4. stockguru

    stockguru Active Member

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    Excellent post. I believe there is also a stretch of valuations in companies which operate in a niche sector or they don't have any other players from their sector listed on the stock markets. This could get corrected in the future as there would be more listed players and the fancy or the niche attached with those companies would fade away.
     
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