We have written at length about determining intrinsic stock value as a guide to value investing. But, what affects the current value of an investment? How can the current value of an investment vary over time? Along this line of reasoning Bloomberg writes about how stocks today do not seem to reflect the improving economy and earnings.
Neither this year’s impressive corporate earnings results nor the synchronized pickup in global growth nor record levels of stock buybacks by companies has led to impressive gains in stocks.
The performances of the Dow and the S&P suggest the improvement in economic and corporate fundamentals has been accompanied by a de-risking illustrated most vividly by the decline in market price-to-earnings ratios.
The point of the article is that despite better earnings, stocks have leveled off. Regarding what affects the current value of an investment, the author says that positive earnings were already priced into the market, investors are worried about sustainability of profits, and the Federal Reserve backing off its easy money policy is a headwind for rising stock prices.
The Basis of Intrinsic Value
Value investing is based on intrinsic value assessment and repeated re-assessment. The intrinsic value of any investment is based on future earnings. A strong product line, few competitors in its sector, and R&D that produces new and profitable products are all positives for intrinsic value. A failing economy, high interest rates, and social or political unrest are negative factors. The current stock market rally started as a recovery from the depths of a crash and then continued based on strong earnings. But now, as earnings continue, stock prices are leveling off and have even show evidence of a significant correction. If earnings are still strong then it would seem that societal factors, the prospect of higher interest rates, and political issues are at fault.
Value Instead of Growth
If you have decided to switch your investment focus from growth to value, where do you find and how do you calculate value?
Value stocks are often not ones favored by current market sentiment. Investing novices too often look at what has appreciated recently and assume that the same stock or other investment will continue on its upward course. The history of market bubbles and collapses over the decades is clear proof that this approach does not work. If you are a student of the markets and want to both make a profit and sleep soundly at night, switch your investment focus from growth to value before the market teaches you a painful lesson.
The best profits are often gained when you invest early in a company that has invented or learned how to monetize a new technology. Those investments can also turn around and bite you when someone else enters the market niche with a better approach or simply invents a new technology that replaces the old. If you are looking for a safe investment you will look for products that will predictably remain strong in their markets for years and decades to come. For example, people have been drinking Coca Cola, eating Snickers Bars, and cleaning with Clorox for a long, long time. The current value of investments in Coca Cola and similar companies will be predictable and less likely to lead to losses the negative factors hit the markets.