The 2-Minute Thought: A Changing Paradigm for Stock Valuation?

Could it be that the rules for valuing stocks have changed?  That earnings and cash flow aren’t what determine a stock’s fundamental value? 

I don’t think so.  But every value investor has to be wondering what in the wide world of investing is going on for value investing to be underperforming growth stocks for so long.

Value investor David Einhorn of hedge fund Greenlight Capital wrote in a recent investment letter that it’s natural to question whether value investing still is a viable strategy.  He’s not changing his stripes as a dedicated value investor.  But it’s a strange world we live in. 

He writes: “Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. . . What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?”

In other words, how do we explain the meteoric rise of Tesla and Amazon?  He goes on to say, “Our view is that Amazon can disrupt somebody else’s profit stream, it doesn’t mean that Amazon earns that profit stream.  For the moment, the market doesn’t agree.”

 

The 2-Minute Thought will be on break next week and will return November 9.