1 - Does lower interest rates Really imply higher valuation Multiples?
Key Excerpts
" Some say it’s because stocks are simply the present value of their future cash flows. And lower interest rates (r) in the denominator of that equation should result in a higher present value"
" Others argue that when bond yields are lower, earnings yields (Earnings/Price) should be lower as well. That’s because investors are said to be choosing between stocks and bonds (they are “competing” asset classes), and if they are accepting a lower interest rate on bonds, they will also accept a lower earnings yield on stocks. The inverse: they will accept a higher valuation (Price/Earnings)"
" data going back to 1881, the r-squared between the two variables (CAPE Ratio and 10-Year Treasury Yield) is .06, which means that knowledge of interest rates accounts for only 6% of the variation in CAPE ratios"
"If low interest rates were the primary driver of higher valuations, we should see the highest valuations in the lowest interest rate periods."
"But this is not the case. Instead we find the highest average CAPE ratios in the 8th decile of interest rates (range of 4.5% to 6% 10-Year Treasury yield). This occurred during the dot-com bubble in the late 1990s and early 2000s"
"story of the early 1980s, the one where interest rates started at record highs and were accompanied by extremely low valuations? Yes, this is a good one, and over the next 18 years stock prices and valuations would rise while interest rates would fall."
"the period from 1949 to 1968 when valuations and interest rates moved higher, together"
"There have been a number of periods where interest rates and valuations have been low (1934-35, 1938, 1940-1954) and other periods where interest rates and valuations have been high (1995-2000). There is no precise formula that can give you the appropriate valuation at a given interest rate."
Read More: https://compoundadvisors.com/2021/do-low-interest-rates-justify-high-valuations
2 - MOATS only matter if you have a strong management to execute the business
Key Excerpts
"MOATS ARE IMPORTANT. They help great businesses sustain high RETURNS ON INVESTED CAPITAL and growth, thus producing SHAREHOLDER VALUE. But what moats really do is buy time. They can’t fix what happens in the castle"
"Even a moat with an able and honest lord might not be enough if it turns out the castle is situated in the wrong place."
"Consider the oil & gas industry. In the first half of the 2010s, when crude oil prices were regularly around $100 a barrel, some energy services companies with apparent moats like Core Laboratories, Schlumberger, and Halliburton looked poised to flex their competitive positions and generate strong shareholder returns."
"Yet this proved not to be the case. While the energy services companies’ moats might have remained intact and had able management teams, their castles depended on oil prices"
"Three things we look for when measuring our companies’ long-term relevance potential are a proven ability to:
Adapt and embrace change - Starbucks changed its model of 1990s from a comfy home type place to a order efficient chain as main theme that picked up in 2010s was take-away Coffee. The company was also an early mover in digital ordering, mobile payments, and loyalty programs.
Survive crises and emerge stronger
Delight their customers: One of Costco’s core strategies has been what investor Nick Sleep calls “scale efficiencies shared.” As Costco grew and gained bargaining power with suppliers, rather than keep the savings for itself, it returned the savings to members in the form of lower prices."
Read More: https://intrinsicinvesting.com/2021/03/17/a-moat-without-a-castle/