Do Lower Valuations Represent Good Value?

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In their recent episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discussed Do Lower Valuations Represent Good Value? Here’s an excerpt from the episode:

Tobias: One of the things I like about these kinds of markets if we get a little sell off here is that it does give you that opportunity to buy better quality stuff whenever it’ll get squashed up with the deep value stuff. I think we’re going to get a chance this time around. I hope we get a chance this time around. I don’t have any view one way or the other. I hope, I hope, I hope.

Bill: The downside, man, is rates may have peaked. And if they peaked, everything goes burr.

Jake: Oh.

Tobias: But here’s the thing. Let’s do some macro bullshitting.

Jake: [laughs]

Tobias: Inflation is running at 8%, interest rates are well, well south of that. It’s a political conundrum for the Fed, whether they step on the inflation or whether they step on the stock market. Stepping on the inflation steps on the stock market. And then Biden’s going into complain to them about inflation. So, maybe that’s the way it goes. I have to step on the inflation.

Bill: I don’t think Biden is actually complaining about inflation behind closed doors. I think he’d have to be crazy to be doing that.

Jake: What do you think he’s–

Tobias: No, just got to be seem to be doing it. [crosstalk] immediate that inflation.

Bill: Look, I think if you’re complaining to the Fed about inflation, what you’re saying is that I want rates to go materially higher. That scenario to me screams recession. So, I would say, “Let’s let inflation run hot for two to three years and see where we are-

Tobias: Yeah. It’s as a– [crosstalk]

Bill: -as a politician.”

Jake: I feel this still all assigns way more power than the Fed actually has to this whole thing.

Tobias: I think that they’ve already committed. They’ve created the conditions, they have created the inflation. I think that they have the power to do that. I think that now whether we’re talking about whether they crash the stock market or the other things they can do, we’re talking about problems that they’ve created over the last five years. And so, like, how they navigate their way out like–

Jake: You mispronounced hundred years.

Tobias: Well, that’s true. That’s true. It has been–

Bill: Well, a lot of it was stimulus though, too, right?

Jake: Yeah.

Tobias: Yeah, that’s fair. All those charts that have got those wild runs up and runs back down. I think we’re probably getting close to back being down trend for a lot of those things. So, it’d be interesting like whether we stop a trend or not. I don’t know.

Bill: I think it’s funny when people are like, “Well, tech valuations are lower than they’ve been.” It’s like, “Well, yeah, but it’s not 2018 and 2019 it was screamingly cheap valuations.” I think you make the argument that there’s a lot of stuff out there that is fair or cheap right now. But to say, well, when things were growing like crazy and people promised flowers at the end of the road, and now people are questioning whether or not those flowers exist, no wonder the valuation has come in. That’s part of what valuation represents, right?

Tobias: I think it’s a little bit cheap, but I agree with you. I don’t see a lot of obvious value there. I don’t think there’s any easy decisions there.

Bill: Yeah. Look, this is stuff that I don’t know and I don’t really know.

Tobias: It’s what the podcast is for, sir.

Bill: Yeah.

Jake: [laughs]

Bill: I bet like Texas Instruments is something you could get a reasonable real return out of here. I think people like, “How does Coke trade, where it trades?” Well, if you are really worried about inflation, it makes sense to hold something like that.

Tobias: What’s the Coke thesis for inflation–? [crosstalk]

Bill: Well, I just think historically, they’ve been able to show pricing power and God forbid, you actually think inflation is transitory. The probability that they’re going to give back the price takes, there’s no way. So, if their input costs come down, you could see some margin expansion on the backend of this that maybe surprises people that they’re not looking at today.

Tobias: Did the same thing happen to Coke that happened to the macro beer brands? It’s just so much easier to get micro off brand colas, and different kind of waters, and things like that. Whereas previously it was like, you had to have all the shelf space and all the advertising. Now, people don’t care, because you’re getting a different kind of access to different stuff through Instagram. Instagram pitches me nonalcoholic everything these days.

Bill: Yeah.

Tobias: Nonalcoholic beer.

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