Mired In Stock Market Froth

Unless I think a business is trading at a discount, I don’t cheer stock price movement forward. I cheer on earnings growth. If a business grows by 5% in a year, I expect the stock to go up by 5%, all else equal. When the stock price goes up much faster than earnings growth, or lags it by a noticeable amount, then I evaluate the business to see how much current sentiment is shaping future returns.

The consequence is that I don’t really cheer the post-election rally that we’ve seen since November 9th. Most stocks are up about 5% since then, though sectors such as financials and industrials have received outsized gains. This creates a problem for those seeking out investment opportunities because the P/E ratio of stocks continues to climb.

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Muhtar Kent Resigns as CEO of Coca-Cola

Coca-Cola CEO Muhtar Kent announced this morning that he is departing from his chief executive position of the world’s largest beverage producer that is in charge of producing 3.5% of all liquid consumed on planet earth each day. He has been at the helm since July 2008.

I don’t like judging executives based on the stock price changes that occurred during their stewardship because that incorporates a lot of investor sentiment. Instead, I like to weigh the question: What did you actually do to improve business performance?

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Bank of America Stock Finally Delivers The Wealth

On February 9th, 2016, I wrote the article: “Bank of America Stock: Getting Dirt Cheap” in which I argued:

But when the earnings are so high relative to the price of the stock, why would you discard it now? This is the fun part–the rocket is about take off. Whether it happens quickly or takes a few years shouldn’t matter, as the magnitude of the waiting capital gains is so substantial that it is worth the opportunity cost of an extended delay for the market to price it accordingly.

What caught my attention at the time is that it was making $17 billion in net profits while only being valued at $160 billion. I thought this made the stock quite cheap. It remained unfashionable for a while because the dividend payment was so low at only 15% of profits. People buying Bank of America only got a 1% starting dividend yield, and had to deal with a five-year track record of near perpetual mortgage settlements.

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