Does Valuation Matter?

This article has 10 comments:

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  Eric Fox

  Jul 04 09:17 AM

  My Website
  In the long run nothing is more important than valuation, but as you correctly stated momentum can carry a stock for a long time. Both these stocks can go a lot higher. It's too bad oil doesn't have a PE ratio, then we end the debate on its fundamental worth.
•  
  rickf

  Jul 04 09:54 AM
  Frankly given the shaky data that 'analysts' and pundits base their reports and recos on, I think fundamentals and 'value' numbers are fairly meaningles. The past year it's been all about emotion and psychology, not value -- meaning momentum is key. Great stocks can get pummelled into submission because of traders' emotion, not because their 'value' suddenly changes....to that end since last year I've taken any report of 'valuation' or 'cheap' or 'expensive' companies with a BIG grain of salt, because in many cases, the numbers can be fudged rather easily to sustain a few more weeks of price buoyancy. (*cough* BSC, CFC, BAC, UBS, MER, LEH, et.al) With fundamental data being demonstrated as questionable in many of these companies, I really think it's idiotic to place much faith in 'value' calls on a company's numbers. I mean, LEH, C, and UBS may be considered 'value' stocks now but I wouldn't touch them with your money, let alone mine.
  
  Similarly -- the mere fact that 'analysts' and 'rating agencies' still have generally-safe ratings on the mortgage firms (clearly a meaningless rating @ the moment) tells you all you need to know about the concept of 'value' and 'safety' in the market.
  
  The other commenter is correct - it's all about momentum at the moment. P/E, fundies, and such just, in my view, don't matter these days. Perhaps interesting to learn as part of trading homework, but a firm's "valuation" wouldn't be more than 30% of my decision to enter a trade.
•  
  David
  Hamilton

  Jul 04 10:17 AM

  My Website
  "But at times it simply pays to stay onboard as long as the whales keep wanting to eat this type of fare."
  
  Sure, there's always another, greater fool waiting down the line to take it off your hands -- until there isn't. Did people really learn nothing from the dot-com bubble? The moment otherwise intelligent people start to get sucked in by this sort of market -- or individual stock -- psychology is the moment to sell.
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  jjason

  Jul 04 10:25 AM
  Do these firms pay dividends?
•  
  jlounsbury59

  Jul 04 10:37 AM

  My Website
  You can not value a stock without making an estimate of future earnings. The true value of a stock is the present vale of all its future earnings discounted to today. In the long run, all stocks will time average to a true value.
  
  The fly in the valuation ointment is the estimation of future earnings. At best, it is an educated guess. At worst, it is a dart board.
  
  Thus, enter momentum. If one has a nimble strategy with good loss prevention techniques, one can far outperform a successful value investor with momentum trading. I believe the truly great can combine value investing with momentum strategies.
•  
  lickety
  split

  Jul 04 10:45 AM
  "the market can stay irrational longer than you can stay solvent"
•  
  Jack Yetiv

  Jul 04 11:34 AM
  Mark, nobody can dispute your examples.
  
  BUT, Warren Buffet is not considered the best investor of all time by following the above belief.
  
  He is the best example of "value" investing there is--and he has done pretty well over many years.
  
  I'm with Warren on investing style.
  
  Jack
•  
  Levan

  Jul 05 08:15 AM
  "Valuation, valuation, valuation" is the way for fundamental analysis and stock price is represent for the company business worth.
  If you find out the current stock price greater than its intrinsic value or company discount future value; then you the price you is looking at is a momentum value by human emotions - greed & fear.
•  
  Eric Fox

  Jul 05 09:33 AM

  My Website
  rickf..you said "The past year it's been all about emotion and psychology, not value -- meaning momentum is key."
  
  It seems that it is always about this.
  
  Also, you are assuming that valuation always has to do with earnings and since you have no faith in analysts or company management then you have lost faith in value investing. Valuation can be based on assets as well. All the stocks you mention looked "cheap" because the book value had not been updated and since the price had declined they seemed "cheap." Many of them were also extremely leveraged - another thing that value investors avoid. The lesson - just because a stock is down 50% does not make it a value stock or a good investment.
•  
  H.J. Huney

  Aug 07 07:32 AM
  I agree 100% with David Hamilton's comment above.
  
  Valuation still matters in the long-run. Stocks can run on momentum for a long time, but eventually, if the price is based on nothing but thin air, the roof is going to collapse. The tech bubble collapse in 2000 demonstrated that rather nicely.