Ignoring Valuation: Costs Time and Money
Experience is the best teacher... but tuition can be expensive
Thomas Macpherson is one of my favorite authors here on Guru Focus. His articles offer valuable insights into how real world money managers make buy-hold-sell decisions.
Thomas is an Ivy League educated value investor and the very successful managing partner of an investment firm.
Nintai recently sold its entire long-term holding in Factset Research Systems (FDS, Financial), a position held since June of 2005. They did so because the stock now appears overvalued.
I use a somewhat different methodology in evaluating the shares before arriving at the same conclusion.
Use the link below to see Thomas’ commentary on Nintai’s decision.
http://www.gurufocus.com/news/317556/changes-in-the-nintai-portfolio
Knowing a stock’s valuation history is a very powerful tool. During 2007's market euphoria FDS peaked at $74. The shares traded for almost 35x that year’s earnings while yielding just 0.4%. Factset’s 2007 EPS ended up at $2.14.
By definition, not selling at that valuation turned out to be a mistake. At Factset's 2008 low it could have been repurchased for less than $32. At that time Factset was available for under 13x earnings while sporting a 1.73% current yield.
The stock didn’t permanently break above its 2007 pinnacle until two and a half years later. Hanging in there from 2007’s high proved to be a huge lost-opportunity cost.
Early 2011 saw another valuation surge in FDS shares. That spring the stock rose to north of $112. At that price the multiple was 30.9x forward projections and the dividend rate was 0.89%. Final 2011 EPS came in at $3.64.
Too high a price usually leads to poor future returns.
Profits grew to $4.13 in 2012. The stock went as low as $85.40.
EPS surged to a record $4.59 in 2013. FDS continued to trade basically sideways.
2014 was destined to see even better results, at $4.96 per share. Even so, FDS could have been bought for as little as $101.40 early on. Failure to exit when valuation crept to well above that company’s own normalized average led to about three years of stagnant returns.
Factset proved to be a terrific company. Long-time owners ended up making decent capital gains. Imagine, though, how much more could have been garnered by trading in and out based strictly on the stock’s valuation parameters.
At last Friday’s close of $158.05 FDS fetched about 25% more than its average forward P/E over the most recent eight years. Why continue holding shares that may need lots of time simply to grow into their present day price?
Who wants to risk waiting one, two or three years for the next leg up while pocketing less than 1% in annual dividends?
I think Thomas and Nintai Partners made a very well reasoned Sell decision. Kudos to them.
Factset Insiders seem to agree.
So does independent research outfit Morningstar. If FactSet returns to its long-term average P/E and meets expectations for this fiscal year (ends Sep. 27, 2015) year it could drop back to around $125 - 128. Near the end of 2016 a normalized multiple would support a target price of $140 - $145.
Taking profits in shares that appear set for long periods of underperformance can help the rest of your portfolio show outstanding results.
Ignore valuations at your own risk.
