A couple of weeks back, I dropped an atomic bomb on the idea that historical valuation across decades carries an appreciable amount of implication or signal for investors. My argument was grounded in common sense – one thing I’ve learned from years of studying the history of markets is that it’s not different this time, it’s different every time.
The piece went crazy online and I got a ton of feedback on it. I’d say about 90/10 positive to negative. You can read it here, in case you missed it:
Adam Parker at Morgan Stanley apparently agrees with me. He put out a note to clients this week basically saying that many of the methods we use to measure corporate valuations no longer work, and haven’t worked in a long time.
Here’s Parker (via Myles Udland):
Think again about Black Friday being smaller than Amazon Prime Day. This is a great example of how the new economy is taking over the old and how historical relationships between economic factors and consumption just no longer apply. You can’t use 1975 logic to analyze the 2015 world. Over 20% of companies in the top 1500 by market capitalization in the US have zero inventory dollars. The largest, GOOGL, is forecasted to be a $70 billion revenue company with zero inventory. The ways to measure the economy and corporate results are clearly different today than they were 30 years ago, when only 5% of the biggest 1500 US equities had zero inventory dollars. So, in our view, healthcare, consumer, and technology can perform well while industrials and metals and mining perform poorly. That could last for a while and doesn’t have to mean revert because in 1975 it seemed logical in some textbooks.People thought Pluto was a planet back then also, and that the Red Sox and Patriots would never win championships. They were wrong.
Josh here – No one is suggesting that stocks shouldn’t trade on the basis of earnings and revenues. Rather, the point is that there are entirely new business models emerging in the new century for which there simply aren’t appropriate comps for in economic history. Looking at price/book multiples from steel mills and copper smelters in the 1970’s as a guideline for understanding Google is pretty dumb.
Profit margins can certainly contract from here, but find a bottom at far higher levels than they did in, say, the early 1980’s. Which means those waiting for the single-digit PE ratios that kicked off the ’82-2000 Bull Market may end up waiting a long time, possibly their entire lives, before getting a buy signal.
A realization of this fact is in order.