Tag: valuation

How Low Will Valuations Go?

How Low Will Valuations Go?

The S&P 500 is approximately at its long-term average P/E multiple of 20x (if one looks back to 1964). However, that multiple could go lower should the Fed hold rates higher for a longer period than what many investors expect. Further, markets tend not to bottom until after the Fed begins to cut rates (we … Continue reading How Low Will Valuations Go?

OpenAI’s Rich Valuation

OpenAI’s Rich Valuation

Irrational valuations still exist, especially in the private market thanks to more than a decade of easy Fed policy. 2023 will be the year that venture firms write down portfolio valuations if they have not done so already. We wrote about OpenAI's natural language offering - ChatGPT - last week. For what it's worth, OpenAI … Continue reading OpenAI’s Rich Valuation

ROIC and M&A. Adobe Gets an “F”.

ROIC and M&A. Adobe Gets an “F”.

Quality management teams measure the effectiveness of their M&A programs on a deal-by-deal basis. My favorite measure is Return On Invested Capital or ROIC. There are various ways to calculate ROIC. More important is the discipline of working through the process. Consider Adobe's $21.8 billion acquisition of Figma ($20 billion of cash and stock plus … Continue reading ROIC and M&A. Adobe Gets an “F”.

Analyzing an M&A Transaction

Analyzing an M&A Transaction

We were critical of Adobe's (ADBE) acquisition of Figma for a few reasons. These elements can be applied to the analysis of any M&A transaction. Valuation: 50x revenue is a rich valuation no matter how you slice it. I don't care how unique Figma's product offerings may be or how competitive the deal may have … Continue reading Analyzing an M&A Transaction

QT Has Only Just Begun

QT Has Only Just Begun

The Fed's balance sheet declined modestly ending the week at $8.91 trillion, down from $8.93 trillion and up from $8.76 trillion at the beginning of the calendar year and up from $4.17 trillion in January 2020 (just before the unprecedented fiscal and monetary stimulus programs of 2020 and 2021). As we wrote on Tuesday, the … Continue reading QT Has Only Just Begun

Earnings Estimates Are Too High

Earnings Estimates Are Too High

While the S&P 500 index is down approximately 21% YTD, it appreciated 44% from its pre-COVID high in February 2020 to its recent high during January 2022. One could argue that the pre-COVID high of February 2020 was a rich valuation for the index which benefited from years of accomodative Fed policy and low inflation. … Continue reading Earnings Estimates Are Too High

Strong Correlation Between M2 Growth & NASDAQ Composite Growth

Strong Correlation Between M2 Growth & NASDAQ Composite Growth

We compared the year-over-year percentage change in M2 (measured each month) to the year-over-year percentage change in the NASDAQ Composite (measured each month on a one-month lag) and found a strong correlation as measured by a correlation coefficient of 81.7%. Our analysis covered the percentage change in M2 from April 2020 (when the money supply … Continue reading Strong Correlation Between M2 Growth & NASDAQ Composite Growth

Cash Flow Is King In A Bubble Economy

Cash Flow Is King In A Bubble Economy

Cash flow is king in a world smitten by nosebleed valuations and unsustainable spending The Fed's commentary around potentially increasing the Fed Funds Rate in 2023 vs. 2024 reminds me of the equity analyst who would base his valuation case on a P/E multiple applied to an earnings estimate that was five years in the … Continue reading Cash Flow Is King In A Bubble Economy

Investors Should Ask More of Their Management Teams

Investors Should Ask More of Their Management Teams

One of the great distortions caused by the joint fiscal and monetary policy of 2020 and 2021 is that equities and the lowest-rated non-investment grade credits are two of the all too rare places where investors may earn a return. Savers and Fixed Income investors be damned. Many companies are enjoying their stocks trading at … Continue reading Investors Should Ask More of Their Management Teams