Vitaliy Katsenelson: Investors Have To Differentiate Between A Good Company And A Good Stock

In his latest interview with The Millennial Investing Podcast, Vitaliy Katsenelson explains why investors have to differentiate between a good company and a good stock. Here’s an excerpt from the interview:

Well, it’s a first level of thinking and second level of thinking. First level thinking is something that’s basically almost comes to automatic. I’ll give you company and you say, “Great company.” Amazon, great company. Microsoft, great company. PayPal, and keep going. And the problem is everybody knows that, that those are great companies and therefore they usually priced accordingly.

But the problem is those companies may be great companies. Those, in other words, you would want to work for them, but it doesn’t mean that you want to own them as investments. And the reason for that, because for them to be great stocks, they have to offer you good long term return. The return comes from two factors. I’m going to put dividends aside for a second, but it’s safe for the stock price. It’s really earnings growth and change in price to earnings.

If those companies are very expensive and a lot of their earnings growth will be consumed by price to earnings compression at some point. Over the last 10 years, they didn’t matter because price to earnings only went up. But at some point, we already saw this happen to a lot of great companies. They’re talking over Zoom and Zoom was down 70% since it’s highs. Even though you’d say it’s still a good company, it wasn’t a great stock when it was at much higher.

I’m not even sure, if it’s still good stock today or not. You have to differentiate between a good company and a good stock. A good stock is basically has to do with what’s expected to return when companies’ growth rate kind of normalizes.

You can watch the entire interview here: