The S&P 500 price earnings ratio shot up to over 100 times earnings, a reflection of massive write offs and depressed earnings. In fact, there were outstanding values in the stock market at that time! It was a good time to be a buyer.
Declining free cash flow may be a sign the company is investing for the future! Or it may be a very bad sign. Increasing free cash flow may be a good sign or a bad sign. It’s all in the interpretation of the financials.
The majority of investments are in intangible assets, including research and development, customer acquisition costs and branding. But companies commonly expense these investments on the income statement as they incur them.
There won’t be many seven footers out there. The vast majority of stocks don’t measure up and can be ignored.
To understand how a company can lose $256 million in reported earnings in 2020 and yet show FCF that year of $491 million you need to read and understand the company’s cash flow statement.
JPMorgan Chase reported strong results in the fourth quarter as we earned $11.0 billion in net income…and an ROTCE of 20%
Something that knocks the pins out from our normal understanding of price earnings ratios, return on invested capital, discounted cash flow analysis, smart beta/factor ETFs, value at risk models (VAR) and even company financial statements
Sunkenness – intangible investments tend to be worth less if they go wrong
Among other factors, indicators of extremes of euphoria seem much more important than price
Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes
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